New rules to dampen home sales in Canada, mortgage lenders warn

Canada’s mortgage lenders state tougher borrowing rules suggested by Canada’s banking regulator could reduce the volume of home sales in Canada by 10 per cent to 15 percent annually as buyers find it more difficult to qualify for loans.

Mortgage Pros Canada — a business association representing lenders, mortgage brokers and mortgage insurance companies — said the financial effect of proposed stress-testing rule changes could lead to 50,000 to 75,000 fewer home sales per year in Canada when combined with additional mortgage-rule changes announced last year and a recent rise in rates of interest.

Association president Paul Taylor reported the effects of the change could cascade further as other buyers will still make purchases, but will be eligible for smaller commissions and purchase less-expensive homes.

“Essentially, everybody will step down a rung or two, so there’ll be real pressure on all home costs to also fall by a two or three,” Mr. Taylor said in an interview.

The mortgage institution is the most recent set to air concerns about a proposal by the Office of the Superintendent of Financial Institutions (OSFI) to require home buyers who don’t require mortgage insurance — people with down payments of over 20 percent of the cost — to prove they could still afford their mortgages if interest rates were just two percentage points higher than they negotiated.

OSFI published the proposed changes in July with a request for public comment, saying it had been aiming at implementing the changes in the autumn if the program proceeds.

The Canadian Home Builders’ Association has also voiced concerns about the proposed change, stating Canada could see 20,000 to 30,000 fewer new housing starts annually when combining the proposal along with other recent policy changes.

In a submission to OSFI, the builders said a fall in new construction could decrease employment in Canada by between 42,500 and 63,800 projects yearly. Including the effect on resales of existing homes, the entire number of jobs lost could be as large as 91,500, the team said.

Builders fear OSFI’s most recent proposal has the potential for unintended consequences if it ends up helping activate the housing market downturn it’s attempting to buffer against, said Jason Burggraaf, government relations and policy advisor at the institution.

“Our concern is that each of these consumer confidence signals which are being put out there might themselves become a self-fulfilling prophecy,” he explained in an interview.

“They sort of heap on top of one another, seemingly with no co-ordination. Each one does its little bit, but it is finally the straw that breaks the camel’s back. All of them together especially squeeze the first-time home buyer, who does not have access to a substantial down payment for their dwelling.”

OSFI proposed the rule change in July to bring qualification rules for uninsured mortgages into closer alignment with comparable stress-testing rules introduced last year for men and women that are applying for guaranteed mortgages — those who don’t own a 20-per-cent down payment. When those principles were rolled out last October, Finance Minister Bill Morneau said they were aimed at ensuring borrowers don’t take on mortgages they can’t afford if interest rates climb.

Ontario Real Estate Association chief executive officer Tim Hudak, who represents property agents in the state, said last week the most recent change has to be evaluated on top all of the latest policy reforms, including last year’s stress-test rule changes, new foreign-buyers taxes in British Columbia and Ontario, and two recent hikes in interest rates. Mr. Hudak said the cumulative effect “dangers capsizing the housing market {}”

The Canadian Home Builders Association and Mortgage Professionals Canada advised OSFI the proposed tougher rules may also raise financial system risk by forcing more borrowers to use unregulated lenders who don’t need to follow OSFI’s criteria.

They also warned that the rules could push some customers away from long-term, fixed-rate mortgages — that have higher interest rates but leave borrowers vulnerable to interest-rate volatility — to shorter-term mortgages with lower interest rates which can more readily qualify under the tougher rules. Such a change could add risk to the financial system as a whole if more borrowers are subjected to short-term interest rate volatility.

Mortgage Pros Canada urged OSFI to consider a lesser stress-test level, implying a methodology that could evaluate mortgage worth at about 75 basis points — or three-quarters of a percentage point — greater than the negotiated rate.

OSFI hasn’t disclosed as it will decide on whether to proceed with the change as suggested, saying only it will finalize its principle after reviewing admissions and hopes to establish an effective date for later in 2017.

Courtesy: The Globe And Mail

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