Canada's banking regulator is facing calls to delay new changes in mortgage rules in the face of Wednesday's interest-rate hike as industry experts say a series of recent measures could go too far to cool the country's hottest housing markets.
Senior real estate officials said they do not anticipate the Bank of Canada's move to raise its key interest rate to 0.75 per cent from 0.5 per cent will have a major impact on home buyers on its own because the increase is modest and rates are still extremely low by historic standards.
But they said the change is more worrisome coming on the heels of a series of other reforms that have already led to a drop in sales and prices in the Toronto region, which is Canada's largest housing market. The changes include tougher stress-testing rules introduced last fall by the federal finance department, as well as a package of reforms unveiled by the Ontario government in April to cool the market, including a new foreign-buyers tax.
Last week, the Office of the Superintendent of Financial Institutions (OSFI) announced a proposed rule that would further toughen its mortgage qualification rules, requiring lenders to test all uninsured loans – those with down payments of at least 20 per cent – to ensure borrowers could afford their loans even if interest rates were two percentage points higher than the offered rate. The move would reduce the size of mortgages many people will qualify to receive.
Chris Alexander, regional director for Ontario and Atlantic Canada at realty firm Re/Max, said there has been "a lot of drastic change" from the government over the past eight months, and OSFI needs to move slowly to assess the impact of the new interest rate increase and other measures.
"I feel like the government has done a lot and they should probably wait to see how everything plays out before they introduce more measures," he said. "We still haven't even seen the full effects of the [Ontario] fair housing plan, and we're already talking about putting in more regulations. I think it might be irresponsible."
Phil Soper, chief executive officer of Royal LePage, said OSFI's proposed measures are more significant than some of the other reforms that have previously been put in place and said OSFI officials may be "more open to moderating their position" when they review recent data on the flat market in British Columbia and the significant drop in transactions in Toronto in the past two months.
"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.
Canadian Imperial Bank of Commerce economist Benjamin Tal said Wednesday's interest-rate increase on its own would add about $50 a month to mortgage payments for people holding a $250,000 mortgage, which is the average size of an outstanding mortgage in Canada. He said the impact "is not insignificant, but it's not going to derail the market."
But Mr. Tal said the proposed OSFI rule change would have a much bigger impact on reducing the size of mortgage loans that borrowers could receive in Canada. If the Bank of Canada raises rates a further 25 basis points – a quarter of a percentage point – to 1 per cent this fall and if OSFI goes ahead with its plan, he forecasts the growth rate of new mortgage lending in Canada would slow from about 6.2 per cent annually to about 3 per cent.
That means the value of new mortgage lending could fall by between $30-billion and $40-billion a year from about $80-billion currently, he said, and that doesn't include the impact of the recent drop in home prices in the Toronto area, which would also require lenders to borrow less if the decline persists.
Mr. Tal said he agrees with OSFI's proposed change and has called for uninsured mortgages to face tougher stress testing, but said he questions whether too many measures "just means we're pushing the brakes relatively quickly."
"I think the direction is right, there's just the fear we are creating a situation in which too many things are introduced at the same time," he said.
OSFI spokeswoman Sylviane Desparois said Wednesday the regulator will accept public comments on the proposal until Aug. 17 and expects to issue a final guideline in the fall. She said OSFI expects to set an effective implementation date for later in 2017, but the exact date has not been determined yet.
An increase in prime lending rates will have an immediate impact on borrowers who have variable-rate mortgages, which are tied to the prime rate, said James Laird, co-founder of RateHub.ca. Mr. Laird said he expects fixed-rate mortgages will also increase going forward, although they are linked directly to bond yields rather than the prime lending rate.
Mr. Laird anticipates fixed rates will rise another 15 to 25 basis points to fully capture the run-up in bond yields, but said he doesn't expect bond yields to climb significantly more because the Bank of Canada did not signal an intention to raise rates further in the near term.
Original Source: Globe & Mail, July 12th, 2017 (subscribers only article)