Things are about to get a lot tougher for Canadian home buyers applying for a mortgage.
That’s because yesterday, Canada’s biggest banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), announced its new mortgage qualification stress test.
Starting January 1, all uninsured mortgage borrowers will need to qualify at either the Bank of Canada’s five-year benchmark rate (currently 4.89 per cent), or at their contract mortgage rate, plus an additional 2 per cent.
“These revisions… reinforce a strong and prudent regulatory regime for residential mortgage underwriting in Canada,” writes OSFI Superintendent Jeremy Rudin, in a statement.
According to CIBC Senior Economist Benjamin Tal, the announcement is bad news for both the real estate market and would-be home owners.
“This change will certainly slow down demand, and with it the market — the question is not if it will affect the market, but how much,” Tal tells BuzzBuzzNews.
It’s a sentiment shared by Garth Turner, a former MP and author of the popular Greater Fool finance blog, who says the new rules will seriously cut into the amount of available credit for home buyers.
“This is going to have a huge impact on the market — you can’t double mortgage rates in one year and not have an impact,” Turner, who is known for his bearish take on the market, told BuzzBuzzNews. “You’re going to see a drop in prices, and a slowing of the market. When you look at how the market was already doing, it’s kind of a perfect storm for residential real estate.”
The move comes a year after the OSFI implemented the stress test for insured mortgages, which seemed to do little to cool Ontario’s red-hot housing market.
Now, the test will affect a much broader range of home buyers, at a time when the real estate market is still dealing with the effects of Ontario’s Fair Housing Plan — national sales rose a only 2.1 per cent in September, while the national price of a home was up 2.8 per cent.
“In the last six months, Ontario’s real estate market has borne the brunt of government intervention after government intervention,” writes Ontario Real Estate Association CEO Tim Hudak, in a statement. “As a result, sales activity in the Greater Golden Horseshoe has slowed. While Realtors support a sensibly regulated real estate market, OSFI’s new stress test… is overkill.”
According to Tal, the new rules could take 1 to 2 per cent out of the national market’s growth in the next month.
“Given that the market is growing by 5 to 6 per cent, this development could take 1 to 2 per cent out of its growth, as demand for mortgages slows,” he says.
Tal also predicts that the new rules will push home buyers to consider the unregulated sector, which includes credit unions and alternative lenders.
“The benefit of this move is going to go to the unregulated section of the market,” says Tal. “Of course there will be some people who decide to keep renting, and some people who choose to stay in the regulated sector, but I think you’re going to see a lot of people move towards credit unions now.”
While the move may have some short-term effects, not everyone believes that the new rules will impact the market in the long-term.
Realosophy Brokerage co-founder John Pasalis says that, while home buyers may be discouraged from applying for mortgages for the next few months, he believes that any cooling of the market will likely be short-lived.
“I think the psychological effect is going to be the biggest thing — these type of policy changes cause worry,” Pasalis tells BuzzBuzzNews. “It’s like what we saw with the province’s Fair Housing Plan, where people were worried and waiting to see what would happen. If the market does cool, I think it will be for a few months, with people hitting pause now and then jumping back in later.”