Proposal for tighter mortgage rules sparks warnings from experts

by Invesbrain Thursday, July 20, 2017
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The prospect of stricter stress tests for uninsured mortgages may cause Canada’s red-hot housing markets to finally say “Uncle!”

In a move one mortgage market expert described as “playing with fire”, the national banking regulator, the Office of the Superintendent of Financial Institutions, is considering further toughening its mortgage qualification rules by requiring lenders to apply the same standards used for insured loans to uninsured loans. That would mean the latter class of borrowers -- those with down payments of at least 20% -- must be able to afford their loans even if interest rates move two percentage points higher than the offered rate.

Rob McLister, founder of, told BNN that the OFSI move “could easily be one of the most impactful mortgage restrictions of all time.”

According to BNN, around four out of every five mortgages in Canada are conventional, uninsured loans -- and big banks dominate this particular vehicle. If OFSI expands the stress test, McLister estimated homebuyers pursuing this line of financing could see their purchasing power reduced by 18%.

“As we've seen time and time again, onerous mortgage regulations aren't necessarily a death knell for housing,” said McLister. “But if housing does dive because of OSFI's move, not only will policymakers and our real estate-dependent economy get burnt, but so will anyone who relies on home equity.”

CIBC economist Benjamin Tal warned that, in conjunction with the Bank of Canada’s July decision to raise its key benchmark lending rate 25 basis points to 0.75%, the OFSI measure could halve the growth of new mortgage lending nationwide -- and, with a slowdown in consumer spending, trigger a recession.

“Given current momentum in the market, it might be advisable to rethink the timing” of new stress tests for uninsured mortgages, said Tal.

On its own, he said, the BoC’s most recent rate hike would add about $50 a month to people to mortgage payments for people holding a $250,000 mortgage, which is the average size of an outstanding mortgage in Canada. He described the impact as “not insignificant but it’s not going to derail the market.”

Related: Interest rate hike could prolong Toronto housing market slowdown

However, Tal said if the BoC raises rates another 25 basis points to 1% this fall and OFSI goes ahead with its plan, he forecast the growth rate of new mortgage lending in Canada could fall to about 3% from 6.2% annually.

In dollar terms, Tal said that works out to a loss of between $30 billion and 40 billion a year from about $80 billion currently.

OSFI spokeswoman Syviane Desparois told the Globe the regulator will be taking public comments on the new stress tests until Aug. 17 and plans to issue a final guideline in the fall. She said OSFI expects to set an “effective implementation date” for sometime later this year.

However, Phil Soper, the CEO of Royal LePage told the Globe that OSFI officials may be “more open to moderating their position” when they see data on the stagnant market in B.C. and a drop in transactions in Toronto in the past two months.

Related: Finance minister Bill Morneau says housing measures are cooling off markets

"One of the challenges that regulators face is that it takes considerable time to complete their analysis, and the market moves very quickly, so there are times when regulators make moves that are out of step with what's happening in the market," Mr. Soper said.

Conflicting numbers

However, real estate watchers are receiving mixed messages from recent data.

On July 12, the Teranet-National Bank Composite House Price Index showed prices rose 2.6% in June from May -- the largest increase for that month in the 19-year history of the index.

Hamilton led the way with prices surging 4.1% with Toronto following at 3.7%. Vancouver posted a gain of 2.5%.

The Teranet report came out before the BoC rate hike but amidst of package of measures introduced by the Ontario government to cool Toronto’s housing market, including a foreign buyers tax.

Related: What’s happening in Toronto’s housing market

However, the Canadian Real Estate Association released numbers five days later showing prices in the Greater Toronto Area fell 0.71%.

There was also a discrepancy year over year: Teranet pegged housing price gains in the GTA at 29.3% over the previous June; CREA had prices increasing by 25.3%.

The difference centres on how the two surveys measure sales. CREA averages all the sales of existing homes and properties done through the MLS. Teranet tracks repeat sales of houses. CREA’s numbers can be skewed depending on the types of homes that change hands in a given month.

That said, CREA’s data shows a considerable drop in sales activity since Ontario introduced its price cooling measures.

According to TD economist Diana Petramala, sales of existing homes fell by over 15% in Toronto, the second straight double digit decline, with resale activity down 42% from its March peak.

Home sales also fell 4% in Vancouver, 29% below their peak in Feb. 2016.

And at least one housing bear claims the slowdown may be worse than the public knows. CREA said Toronto house prices have dropped 14.2% since their April high. However, on his blog the Greater Fool, Garth Turner claims a realtor told him internal CREA numbers show the average GTA property was worth $919,589 in April -- and by July 13 it had fallen to $755,727 or around 18%.

Turner writes that, based on the GTA’s just over 990,000 properties, $162 billion equity left the Toronto area housing market in a little over three months.

“The real estate board has a fiduciary responsibility to represent both buyers and sellers,” says Turner’s realtor source. “So this kind of data needs to be made public in a responsible fashion.” “This market is goin’ down. Yes, it will eventually find a bottom and start to recover, because that’s what markets do. But things are not healthy.”
The realtor also told Turner that he’s seeing “a disproportionate number of vacant and rented properties” being listed, suggesting speculators are heading for the exits.

“You have to remember that people who own and occupy their houses are not gonna bail just because prices start to crash or mortgage rates go up. So this market is totally different now with all that speculation that took place. It’s distorted and investor-driven.”

Writes Turner: “And that’s why this correction is not going to end well.”

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