Canada’s Bank Regulator Proposes Tougher Mortgage Rules While Low Rates Fuel Hot Housing Market

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The Canadian housing market has been under close watch for some time now, as the banking regulator had plans to adjust the benchmark for the stress test before the Covid-19 pandemic hit, which ultimately suspended those plans last March. 

Now, the federal banking regulator has proposed to up the stress-test homebuyers face before getting an uninsured mortgage considering the economic effects of the pandemic. The proposed change would set the rate for uninsured mortgages at the contracting rate plus two percent, or 5.25 percent, whichever is higher. 

The proposed changes come after the average price of Canadian homes rose 25 percent over the last year until the end of February 2021. 

The current rules state that homebuyers who are purchasing a home with a downpayment that is less than a fifth of the total purchase price will be required to show that they can afford the mortgage amount if the interest rate rose two percent. The five-year benchmark rate is 4.79 percent currently through the Bank of Canada. 

The lower interest rates, short home supply, and increased demand have created a booming market and significantly increased home prices, which has prompted the federal government to implement tighter rules to help cool down the market. As we’ve seen in 2017 and 2018, the stress test is an effective way to cool things down. 

In December 2020, real estate sales were up 47 percent, while the average home price has risen over $67,000 across the country. A single-detached home in Vancouver sells for $145,000 more than it did in January 2020. 

The current market has the potential for disaster. If economic conditions worsen, it could put a lot of lenders at risk and homeowners as well. The proposed rate would add a level of safety for both lenders and borrowers, although it is mainly targeted at protecting lenders. 

The proposed rate would take effect as of June 1, after the regulator has taken submissions from stakeholders on May 7. 

The OSFI made a statement on Thursday, stating, “The current Canadian housing market conditions have the potential to put lenders at increased financial risk… OSFI is taking proactive action at this time so that banks will continue to be resilient.”

Jim Laird, the co-founder of Rate Hub, said, “In the near term, this change will make it more difficult for first-time homebuyers to qualify for a mortgage.” He also mentioned that the move would lower homebuyers’ purchasing power by about 5 percent. He added, “However, if this policy has the desired effect of slowing home value appreciation, it may be a good thing for first-time homebuyers in the long run.”

Sherry Cooper, the Chief Economist at Dominion Lending Centres, said that it could create a bit of a surge before the market slows down. “This all but ensures that the current boom in home buying will accelerate further in the spring market — providing an impetus for borrowers to get in under the June 1 deadline… OSFI’s move will trigger an even hotter spring housing market as demand is pulled forward just as it was before the January 1, 2018 implementation date of the current B-20 ruling.”

 

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