Tougher mortgage stress-testing rules could make it impossible for 40,000 to 50,000 Canadians to get a house annually, driving down property sales and reducing the expected pace of new mortgage-lending expansion, according to a new analysis.
A report by Mortgage Pros Canada, a national mortgage-broker industry association, forecasts about 18 percent of home buyers — or about 100,000 people annually — might not qualify for their favorite home purchase option under declared in October by Canada’s banking regulator, the Office of the Superintendent of Financial Institutions.
Mortgage Pros Canada chief economist Will Dunning, who wrote the report published Tuesday, quotes 50 per cent to 60 per cent of those not qualifying will have the ability to adjust their expectations and purchase a less expensive home, but he expects another 40 percent to 50 percent will probably not buy anything since the adjustments they must make would cost them out of the marketplace.
It’ll leave about 40,000 to 50,000 potential buyers annually shut from the current market, which means a 6-per-cent to 7.5-per-cent fall next year in home sales, including sales of both new and resale houses, he said.
He added that increasing interest rates are expected to have a similar degree of impact on home buyers next year, in addition to this stress-test rule impact.
“Between the two — the coverage impact and the interest-rate impact — we are looking at somewhere between 12-per-cent and 15-per-cent less earnings next year than we saw in 2016,” Mr. Dunning said in an interview.
The stress-testing rules, which will take effect Jan. 1, will require borrowers that are making a deposit of more than 20 percent of a home’s value to demonstrate they could still afford their mortgage payments if interest rates have been significantly higher. The OSFI rule change will require borrowers to qualify for mortgages in the greater of the Bank of Canada’s five-year benchmark rate or an interest rate two percentage points higher than they negotiated.
Mr. Dunning said federal regulators have introduced six prior policy changes since 2010 affecting mortgage eligibility in Canada, but until now, only the package of changes in 2012 — that decreased maximum amortizations to 25 years from 30 years — had a significant effect on home sales.
“It seems that this new policy change is also possible to have meaningful and protracted consequences,” the study concludes.
While home sales are expected to fall, the report forecasts 5.5-per-cent increase in the total amount of outstanding mortgage in 2018, which is a decrease from 5.9-per-cent increase in 2017 and the former 12-year average growth rate of 7.3 percent.
Mr. Dunning said mortgage borrowing is forecast to grow despite his prediction of decreasing sales, mainly because there are a lot of new homes under construction that have been started and have buyers scheduled to take possession annually.
“There have been a good deal of housing starts recently and those are likely to be finished next year, so that is going to need plenty of new mortgages on these recently completed dwellings,” he said. “That’s what is holding this up. When you look further out, there is going to be a additional drop off in credit expansion in 2019 and 2020.”
Many analysts have predicted buyers will need to lower their target costs by 20 percent under the new stress-testing rules, but the report said those estimates ignore the fact that most people borrow less than the sum their banks qualify them to borrow, so have leeway to adjust.
According to data from a survey the mortgage institution conducted in the spring — requesting potential home buyers their goal purchase costs, their down payments and their borrowing rates — Mr. Dunning forecasts average home buyers would have to decrease their target costs by just 6.8 percent or by $31,000 under the new rules.
Courtesy: The Globe And Mail