A number of lending rule changes have helped guard against the main threats to the Canadian housing market even as home prices and household debt levels continue to climb, according to the Bank of Canada.
“Rising house prices contribute to two material vulnerabilities that can affect financial stability,” said Lawrence Schembri, the central bank’s deputy governor, at a conference in Kingston, Ontario, on August 25th, 2015. “The resulting strength in the housing market has increased household imbalances, but the risks stemming from these vulnerabilities have been well managed by complementary macroprudential policies,” Schembri explained.
One of the market’s vulnerabilities is the increased debt levels among homeowners that come with higher house prices. The other, said Schembri, is that higher home prices can be a source of overvaluation: prices could exceed a home’s actual value and “such misalignment could suddenly correct and create financial stress,” he explained.
The policies helping to safeguard against these risks include mortgage rules that were implemented in 2012, said Schembri. These changes saw the maximum amortization period for insured-loans in Canada reduced to 25 years, down from the previous 40-year max. This leads to higher monthly payments but lower overall interest payments in the long run.
As well, limits on the total debt-service ratio, used to determine whether a borrower’s debt levels are too high for them to qualify for a loan, have had a positive effect.
“Recent evidence suggests that these measures have resulted in higher average credit scores, which have improved the quality of mortgage borrowing,” said Schembri of the rule changes.
The trend rate of growth of mortgage credit was down to about 5 per cent between 2013-15 as compared to 14 per cent in 2007-08, he noted.
“The credible and effective macro and financial policy frameworks in place in Canada… have contributed to a high degree of macroeconomic and financial stability,” Schembri concluded.