Canada's banking regulator has moved ahead with its new mortgage stress-testing rules on low ratio mortgages. Here are 10 consequences that experts say is in store for the Canadian housing and lending market, under these new rules:
- Depress demand for housing by 5 -10%: According to TD Bank senior economist Brian DePratto, the new mortgage rules will depress demand for housing by about 5 to 10%.
- Cause house prices to fall by 2-4%: As a result of the OSFI change, TD Bank estimates that house prices could slide by 2-4% in 2018. Still notes Mr. DePratto, "these changes should help enhance the resilience of the Canadian banking system in a rising interest rate environment," and as per the Huffington Post.
- Increase risk for the unregulated lending sector: According to the Globe and Mail, the new OSFI rules met with criticism that the regulator is offloading risk to the unregulated lending sector, which does not come under OSFI control – an outcome that OSFI superintendent Jeremy Rudin acknowledged last week, but said he cannot prevent from occurring. Said Mr. Rudin to reporters:
- "That [increasing risk to the unregulated sector] would not be an intended consequence, nor would it be a completely unanticipated consequence.”
- His mandate is to ensure federally regulated banks have secure lending practices.
- OSFI has "ongoing contacts" with provincial regulators that oversee many credit unions and alternative lenders, but "we can't control what we can't control."
- Reduce consumer’s home buying power by around 21%: Currently, a household with an income of $100,000 can afford a house worth around $706,000, assuming a 25-year mortgage at 2.89%; under the new rules, that household would only be able to afford a house valued at $571,000.
- Hit move-up buyers: Last year's mortgage rule changes targeted insured mortgages with less than 20% down, but the new rules will hit "move-up" buyers who are upgrading to a better home. "Some will not be able to get the home they had intended and will withdraw from the market," said Phil Soper, CEO of RPS sister company Royal LePage. "Others may look to less expensive properties, driving activity and prices in the lower-end of the market."
- Encourage borrowers to take on shorter-term mortgages: Some groups have said that the new rules could give borrowers an incentive to favour shorter-term mortgages because they typically have lower interest rates, making it easier to pass the stress-test rules. Critics said it would make borrowers more vulnerable to interest rate increases if mortgages come up for renewal more often.
- Push borrowers into higher-rate mortgages: Other borrowers will find themselves unable to land a mortgage with one of the conventional lenders, and some of those may turn to alternative lenders who offer higher mortgage rates. This includes people with higher debt loads or less proven income, including small business owners, amongst others.
- Could lead to lower competition: In a report on the changes, the Fraser Institute said, “the mandatory standard for stress testing could result in a less competitive and more concentrated mortgage market. Some financial institutions that are niche players in the residential mortgage market may find their ability to pursue their business strategies (such as focusing on segments such as self-employed individuals) impaired. This runs counter to the federal government’s objective of promoting more competition by smaller banks (Canada, 2017b).”
- Will likely spark a buying rush in the short-term: Many predict a small flurry of buying as people rush to ‘ink a deal’ before the new requirements come into effect, as has been the case with past mortgage rules and requirement changes from government and related agencies.
- Hamper job growth: According to Will Dunning, chief economist at Mortgage Professionals Canada (MPC), if this policy reduces housing activity by 10 – 15%, it will mean there will be 100,000 to 150,000 fewer jobs in the economy than there otherwise would have been.
Many people are weighing in and many have already done so directly to OSFI; OSFI said it received more than 200 submissions from federally regulated financial institutions, financial industry associations, other organizations active in the mortgage market, as well as the general public. Here are a few articles and reports for a sense of what the media and industry experts are saying: