New mortgage rules hit the Canadian market on New Year’s day. The Office of the Superintendent of Financial Institutions (OFSI) implemented the new rules, which were detailed in an official report in Fall 2017.
New Mortgage Rules 2018
The new mortgage rules include a requirement to “stress test” mortgagors (borrowers) to qualify for uninsured mortgages.
This is to ensure that they could maintain their loan with higher interest rates. "Stress testing" was previously only a requirement for borrowers to qualify for insured mortgages.
The "stress test" will require the qualifying rate to be the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate plus 2%.
Other regulations introduced this year include:
- regulation requiring lenders to enhance their loan-to-value (LTV) measurements and limits so they will effectively offset risks
- regulation restricting lending arrangements that are designed, or appear to be designed to bypass LTV limits
It has been a wild ride for Toronto real estate over the past year.
Toronto’s real estate market saw an exponential pinnacle in hyper-appreciation early in 2017.
A desperate Liberal government saw opportunity to bolster a low-approval rating with a lengthy 16-point Ontario Fair Housing Plan.
A housing plan that aimed to cool the hot Toronto housing and rental market by making it more affordable. A plan that ends up causing a greater pressure on a market that must deflate around a variety of rules never before seen in the market.
It didn’t come as a surprise, but a variety of the Fair Housing Plan’s implementations are simply stuffers.
For example: three points promise to initiate different government committees that aim to monitor the market…
As if we don’t already have enough interest groups talking about the market. What a waste of money and a means to make action look more effective.
After the announcement, not even the implementation, of the Fair Housing Plan on April, 20th 2017 the market entered a halted state, not necessarily cooled but frozen, as buyers began waiting on the sidelines for a promised and coming cool to Toronto home prices.
Frozen demand simulate cool
Surprise, surprise, the market saw a decline in the average price of single-detached homes as buyer demand froze. Other housing types, especially condos, continued to see an increase, a reaction to a city’s high demand not waiting around for the slow.
This all sounds too similar to the effects of British Columbia’s legislative implementations aimed at tackling Vancouver’s hot housing market. Vancouver's housing market saw a halted reaction of buyers awaiting the cooling results, a sideline that eventually returned to bring the heat back to the market.
Toronto demand heats up in a rush to beat new mortgage rules
In the fourth quarter of last year, the ice melted as buyers rushed to enter market. A returned demand caused by the OFSI new mortgage rule announcement.
Buyers left the sideline in a rush to beat the New Year and it's coming "stress testing" for all borrowers.
So much for a cooled market.
The Bank of Canada has its hand on the thermostat
Despite the many regulations by the Ontario government, parading their re-election campaign, The Bank of Canada (BoC) took a logical approach to the situation by increasing interest rates.
We saw two interest rate hikes last year, in July and September, for the first time in several years. But they won't be the last as we can expect to see another increase next Wednesday.
The logic behind the new mortgage rules
"Stress testing" on all borrowers is a very responsible move. It will ensure that all borrowers can reasonably afford to manage a mortgage by qualifying for a higher rate.
The other regulations implemented by OSFI add safeguards so that lenders start being more careful with their loans. A needed caution with a real estate market that is literally being sat on by the government.
Yes, it will make it tougher for Canadian’s to get a mortgage and it will also slow the market for mortgage brokers and lenders.
Though it would be silly to disagree with such implementation based off the semantics of a slowed and less attainable market.
If we are to responsibly cool the market we don’t need government legislation that acts for votes with promises. We need regulation that can supress a demand, not make it wait.
The problem with government intervention
The Liberals have approached a hot hyper-appreciating real estate market heated in saturated demand with a promise to make it affordable... Hear the problem?
That promise creates a gathering sideline of buyer demand awaiting for the right time to enter the market. The problem with the sideline is that it creates a building demand. A flood that could spill into a market at the first signs of returning demand, an ended cool.
A cooled market is not one waiting to return, it's one supressed in regulation, not bolstered by future opportunity.
In conclusion, the BoC and OFSI know how to cool a market with a cold hard push on buyer demand. Not a "let's make it affordable for everyone" promise and justification of a market's extremities.
If Toronto, Vancouver and Canadian real estate come to a cooler and slower accumulation it will be due to the realistic implementations by the Bank of Canada and OFSI in combination.