Photo: Ian Muttoo/Flickr
Industry professionals have blasted Canadian policymakers’ move to tighten mortgage rules last year, but they aren’t the only ones casting doubt on the measures, intended to safeguard the economy against impacts of higher interest rates on borrowers.
In a weekly look-ahead report, CIBC Deputy Chief Economist Benjamin Tal questions whether making the B-20 rules— which force mortgage applicants with federally regulated institutions to qualify for their loans at a rate 200 basis points greater than they are applying for — is the right policy for the Canadian housing market today.
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“Now, we do not view the original move by the regulator to raise the qualification rate by 200 basis points as an error. Some Canadians needed to be saved from themselves,” writes Tal, before mulling the appropriateness of the policy after five Bank of Canada policy rate hikes already increased the cost of borrowing.
“Given where we are in the cycle, and with policy rates up by 75 basis points since the introduction of the new measures, is 200 basis points still the right number? Not taking a position here… just asking,” he continues.
The B-20 rules, introduced last January, are based on recommendations that federal government agency the Office of the Superintendent of Financial Institutions put forward. They do not apply to private lenders, which are provincially regulated.
While Tal doesn’t call maintaining the stress testing in the current interest rate environment a mistake outright, he does say the Bank of Canada was on its way to erring recently until it hit “pause” on interest rate hikes. “Much more dovish language recently from both [the US and Canadian] central banks suggests that past lessons have not been completely forgotten,” Tal writes.
Last year the Bank of Canada appeared set to continue hiking interest rates in 2019, but with the economy performing weaker than expected as the energy sector has yet to recover, the central bank has moved to the sidelines. “In Canada, the damage caused by the central bank’s premature bullishness was reversed quickly,” says Tal.