Newly proposed rules from Canada’s financial regulator would tighten up the existing mortgage stress test by increasing the qualifying rate for uninsured mortgage loans.
The proposal from the Office of the Superintendent of Financial Institutions (OSFI) is meant to build upon the original mortgage stress test introduced by the federal government in early 2018 by further reducing the presence of higher risk borrowers in the market. But an economist with Capital Economics writes that the proposed tighter rules “shouldn’t prove too consequential” when it comes to soaring Canadian home prices.
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The OSFI proposal would increase the stress test’s qualifying rate for uninsured mortgages to 5.25 percent or two percentage points above the posted rate. That’s up from the current 4.79 percent.
Stephen Brown of Capital Economics wrote in a research note published Friday that the tighter stress test would alleviate some of the Bank of Canada’s concerns about the impact of leaving its mortgage-market influencing overnight rate at its current close-to-zero level for too long.
“[E]xperience suggests that most buyers will not be affected,” wrote Brown. “For example, when they were originally introduced in 2018, the stress tests reduced affected buyers’ budgets by 20%, but Mortgage Professionals Canada said the average impact across all buyers was closer to 6%.”
The economist estimates that the impact of homebuyers’ purchasing power will be under two percent, barely enough to make a dent in the rate that prices are rising annually in many Canadian cities.
Brown’s commentary echoes a recently published special report from BMO Economics in which economists Robert Kavcic and Benjamin Reitzes wrote that the rollout of tighter mortgage standards would be a “low impact” response in any effort to rein in what they called “the extreme strength of the Canadian housing market.”
Interest rate hikes from the Bank of Canada, the elimination of “blind bidding” in real estate transactions and implementing a speculation tax all would be much higher impact policies in cooling the market than the current OSFI proposal.
Following a period of stakeholder feedback, the regulator says the tighter rules would come into effect on June 1st.