Ottawa’s new mortgage rules are designed to stabilize the housing market, but could actually create more affordability challenges for cash-strapped Canadians.
The Canadian government recently announced new measures to stabilize the housing market. But economists in Ottawa are concerned they could lead to a sharp slowdown in housing sales, threatening what little is left of home affordability in one of the costliest countries for real estate.
Finance Minister Bill Morneau announced the new regulations earlier this month. They include a stress test for homebuyers and raising the eligibility guidelines for mortgages to get insured.[1] This also means banks won’t be able to transfer much of the risk of underwriting mortgages to taxpayers. The measures will come into effect October 17.
Economists within Morneau’s finance department believe the new mortgage rules could lead to an 8% drop in home sales within the first 12 months of the measures being implemented. Department spokesperson Jack Aubry elaborated in an email to Bloomberg News:
“In the short-term, the change may lead to a temporary reduction in the pace of housing market activity over the next year. While historical data suggest that, nationwide, up to 8 per cent of new home purchases could be affected during the first year of implementation, the precise impact will vary depend on specific homebuyer circumstances and behaviours.”[2]
Royal Bank of Canada analyst Geoffrey Kwan believes that home sales will fall 10% and property prices by 5%, but didn’t specify a timeframe.
The new rules appear to be part of a bigger plan designed to cool a robust housing market that many fear is overheated. With a feeble economy, the Bank of Canada (BOC) simply doesn’t have the mandate nor justification to begin hiking interest rates. At the same time, Canadians can’t resist cheap credit, which largely explains why we’re the most indebted country in the G7, according to the Parliamentary Budget Office.[3]
As analysts note, a one percentage point increase in mortgage rates would lead to a 9% drop in affordability. That sort of correction isn’t what regulators have in mind.
For borrowers, the new rules essentially mean they have to prove they can afford a mortgage payment based on the BOC’s posted rate, which is currently 4.64%. So regardless of how low rates are today, your eligibility will depend on your ability to pay the Bank’s rate.[4] This so-called “qualification rate” can make or break many prospective homeowners. This will either lead borrowers to smaller mortgages or out of the housing market entirely.
As of August, the average Canadian home price was worth $456,722, according to the Canadian Real Estate Association (CREA). That represents a year-over-year increase of 5.4%. The average is higher in Ontario and British Columbia and much lower in every other province.
References
[1] Katia Dmitrieva (October 5, 2016). “Home sales in Canada could fall 8% on new mortgage rules, Finance Department projects.” The Financial Post.
[2] Ibid.
[3] Daneil Tencer (January 1, 2016). “Canadian Household Debt Reaches 171%, PBO Says, Warning Of Possible Crisis By 2020.” The Huffington Post.
[4] Robert McLister (October 4, 2016). “With new mortgage rules, has Ottawa gone a step too far?” The Globe and Mail.
