Proposal for tighter mortgage rules sparks warnings from experts

by Invesbrain Thursday, July 20, 2017
Print This Article

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 RateSpy.com, 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.”

Record Decline in Home Sales and Listings in April: CREA

Home sales across Canada plunged 57% year-over-year in April to their lowest level since 1984, while the average house price fell back below $500,000, according to the Canadian Real Estate Association (CREA). When compared to March figures⁠—which were already weakened as the ...

Edmonton, Vancouver RE forums postponed due to COVID-19

Informa Canada has rescheduled the Vancouver Real Estate Forum to Sept. 30 due to precautions surrounding the COVID-19 virus outbreak. UPDATED: Informa Canada has announced it has postponed three of its major real estate conferences, in Vancouver and Edmonton, due to precautio...

$210B worth of insight: Major investors talk CRE strategy

Panelists during the wrapup discussion at RealCapital 2020 in Toronto; from left: moderator Lesley Gibson of CT REIT, Don Clow of Crombie REIT, Kevin Leon of Crestpoint, Qahir Madhany of Blackstone, Chris Niehaus of BentallGreenOak, moderator Jamie Ziegel of TD Securities. (Ste...

Institutional investors urged not to overlook Canadian real estate opportunities

While Canadian pension plans are looking further afield for real estate opportunities, are there fresh buys on the home front? Rental apartments are one subset of ......

CPP Investments’ Mark Machin: Stay calm amid economic storm

Mark Machin is president and CEO of CPP Investments. (Courtesy CPP Investments) On a day when oil prices, energy stocks and broader global financial markets crashed, the president and CEO of CPP Investments offered two messages of comfort to a business audience at the Calgary ...

COVID-19 having minimal impact on real estate market – so far

Illustration of a coronavirus, created for the Centers for Disease Control in the U.S. A novel coronavirus is being blamed for the COVID-19 outbreak. (Courtesy Alissa Eckert, MS; Dan Higgins, MAMS / CDC) COVID-19 (novel coronavirus) hasn’t yet put a major dent in the Canadia...

Vancouver RE Forum postponed to Sept. 30 due to COVID-19

Informa Canada is taking measures to keep real estate executives updated on COVID-19 and its potential impacts on Canadian real estate conferences and forums. Informa Canada has announced it has postponed two major real estate conferences in Vancouver due to precautions being ...

People Space: New Colliers CEO, execs at Boardwalk, REW.ca …

Brian Rosen will be Colliers’ new president and chief executive officer, Canada. (Courtesy Colliers) Colliers International (CIGI-T) has announced Brian Rosen will be promoted from Canadian chief operating officer to succeed David Bowden as president and chief executive offi...

Informa postpones Vancouver RE forums due to COVID-19

Informa Canada is taking measures to keep real estate executives updated on COVID-19 and its potential impacts on Canadian real estate conferences and forums. Informa Canada announced late Friday it will postpone two major real estate conferences in Vancouver due to precaution...

CRE optimism remains, despite uncertain times: RealCapital panel

Panelists discussing real estate investing in uncertain economic times at the RealCapital Conference in Toronto, from left: William Secnik of Fiera Real Estate Investments; Jaime McKenna of Fengate Asset Management; Randy Hoffman of Oxford Properties Group; Ugo Bizzarri of Timb...