So is Canada in a housing bubble or not? Do we need stricter rules on mortgages, or not? These are the debates that have been swirling around the country for the past year and now, one Toronto mortgage broker and one policymaker are coming to blows over it.
This newest debate surrounds the Office of the Superintendent of Financial Institutions (OSFI,) the organization that is now overseeing the Canada Housing and Mortgage Company (CMHC.) The OSFI has already suggested that Canadian lenders take many different steps when approving mortgages including taking “reasonable steps” to verify a borrower’s income, that home equity lines of credit in Canada have amortization periods just like all other mortgages do, and that HELOCs also be reduced to only 65% of a homeowner’s equity rather than the current 80%.
So what’s all the fuss about?
Mortgage broker Robert McLister says that the fuss needs to be raised before the stricter guidelines cause a total housing collapse. “How many new lending ‘guidelines’ can the market bear before it breaks?” asked McLister. “OSFI had good intentions here, but some of this policy is certainly misguided.”
McLister believes that the new rules would “hurt housing prices” and that it would also stamp out the demand that’s currently going on in the marketplace.
But isn’t that just what Ottawa’s trying to do to get the current marketplace under control again?
Yes, it is. And after McLister’s remarks, Vlasios Melessanakis, manager of policy development at the OSFI, said so. “Canada is not immune,” Melessanakis wrote in a note to his colleagues in response to McLister’s remarks. “Just because nothing happened in Canada in 2008, does not mean that Canada is not vulnerable to a housing correction now.”
And in direct response to McLister’s comments Melessanakis said, “The market may break because the fundamentals are not sound, such as in the overvaluation of homes, not because of OSFI guidance.”
Melessanakis continued to talk about the housing market saying, “This can change fast. Are the banks equipped to handle a 40 per cent drop? Need to stress test to find out.” The drastic drop in home prices is what the Toronto area saw in the early 90s – a crisis everyone remembers all too well, and that no one wishes to repeat.
And while McLister may not think that tighter rules are needed on HELOCs either, saying that they would “portend a big slowdown in HELOCs,” Melessanakis responded that this was the exact intention.
“[HELOCs have] contributed significantly to growing overall household debt,” and that “this is not sustainable. If (or when) housing prices drop, households will be vulnerable.”
What do you think? Does Canada’s housing market call for further mortgage tightening to slow it down? Or would that only further hurt the economy?
