Canadian banks have begun to weigh in on new mortgage changes, and they aren’t optimistic. Earlier today, the Office of the Superintendent of Financial Institutions (OSFI) announced a revision to the uninsured mortgage stress test. The change will shrink supersized mortgage budgets, reducing the number of over-leveraged borrowers.
Two of Canada’s largest banks say it’s a move in the right direction, but not enough. Both don’t see the changes breaking the current FOMO-driven mindset buyers have. One bank thinks it may actually accelerate home sales before the rules go into effect.
Tightening The Uninsured Mortgage Stress Test
OSFI announced they would begin revising the uninsured mortgage “stress test.” The changes would see the 5-year benchmark mortgage rate rise from 4.79% to 5.25% by June 1, 2021. The 46 basis point increase, drops the max borrower budget by 4.5%, compared to today’s rate.
In any other part of the world, a 4.5% drop in mortgage buying power would be huge for prices. In Canada, where even the central bank cheers on home price growth in excess of income calling it “needed,” it’s not enough. Experts believe a lot more measures are needed to break the exuberant mindset.
Canadian Homebuyer Psychology Won’t Be Impacted Much: BMO
BMO sees the new stress test changes having a small impact, and barely noticeable to buyers. Chief economist Robert Kavcic argues the original rollout of the stress test had a minimal role in slowing down prices in 2018. The original introduction saw buyers lose 4x more buying power. He says, “… it had some bite on sales, but it didn’t move prices at all from their existing path.”
Considering the current market is more exuberant, and the hike is much smaller — it’s not likely to do much. “What’s more, in 2018 the market was also dealing with the fallout from nonresident buyer taxes and, more importantly, the Bank of Canada raising interest rates.” That last one appears to be a sticking point for many economists these days.
Last week, the bank called out the role the Bank of Canada (BoC) played in setting the tone of the market. By promising rates would be “low for long,” the BoC didn’t just say they would no longer make the decision on data. They removed doubt of any near-term rate increases, which would normally temper expectations.
The bank sees this impacting mostly marginal buyers, a.k.a. those who extend themselves the most. Kavcic doubts the new mortgage rules can change the “tone and psychology” of buyers today. By itself, at least.
Stress Test May Spark Even Higher Home Sales, Says National Bank
National Bank of Canada (NCB) sees the possibility the new rules make things worse in the near-term. Deputy chief economist Matthieu Arseneau also sees this as a small change. His analysis highlights the current rules drops the max mortgage by 4.5%. The original introduction of the stress test was a 22% decline in max mortgage. It very clearly can’t have the same impact.
The economist says the changes are a “step in the right direction for financial stability.” However, the additional measures would be needed for any real impact to buyers. He also warns, In the short term, it could have the opposite effect, creating a rush to close deals before the force date of June 1, 2021.”
OSFI’s new measures will have a small impact, appears to be the general consensus. More measures will be needed to cool this market, but that’s largely out of OSFI’s control. Their role is to ensure the safe operation of banks, not cool the market. Wielding power over a small part of the problem isn’t enough to stop a much larger issue.
A lack of cooling measures led to exuberant home buying behavior. Now cooling measures may lead to even more exuberant home buying behavior. It’s getting a little difficult to deny the market’s toxic setup.
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Reducing leverage is a good step to protect a future misallocation of capital, but can’t do much right now. Reducing 17% home price growth by 5% only makes the growth expectation 12%.
I truly believe the only way to handle his situation is to let it ride, until it burns out the pulled forward demand. By pushing demand forward and backwards, they’re creating boom-time price acceleration, but then backstop the declines. It’s like pumping the gas to see it go faster and faster.
The better way to control the capital misallocation is to lower the total debt service ratio. It’s one of the highest in the world, but “essential” to buy housing, based on a randomly generated number of ideal shelter costs generated by banks.
The underlying problem is a lack of supply, and costs imposed by government such as fees, permits, inspections, zoning, bylaws, and many other things that delay and add to property development for housing. And the tens of thousands of acres of land around cities like Vancouver and Toronto that cannot be built on because they are a green belt that is really just an anti-development fantasy. Most of those green belt acres are just bush and weeds and a few hobby farms.
Greenbelt is a scam, encouraged by homeowners masquerading as environmentalists, to increase their property value.
Maybe but if you look at fundamentals there does not appear to be a shortage of housing.
Look at housing completions to population growth.
This is especially true in 2020. Population growth was close to non existent and completions were essentially unchanged.
We really need to stop perpetuating this narrative. It only fuels the fomo.
Banks should verify the income of borrower properly before sanctioning mortgage.income of canadians are not increasing so rapidly as housing prices are increasingand borrowers are getting more finance from the banks with the same income.
Correct. They’re pretending the market overheated on its own, when it was a policy decision to overheat real estate markets.
It can’t be good for the economy, and what you were hoping to do but also unexpected and problematic.
As always, they create demand by saying you only have until June 1 to join the party. Everyone who was going to buy after joins the pile on, and it makes it look worse right before the rules are implemented.
After the date, you already got the people afterwards to buy. It’s going to slow down. Government gives themselves a pat on the back for creating a problem and it resolving itself.
Just wondering if you really know what you just said.
Why can’t the Bank of Canada just raise rates?
Short answer: government.
Long answer: the government can’t pay its bills with the current spending rate at a higher rate, so they need the Bank of Canada to drive rates down for all credit products. Like in any free market.
Why can’t the government enact some kind of emergency law to set mortgage rates to be higher without touching BOC rates, thus not impacting the cost of government debt, just real estate debt?
Because then the government who enacts that law will NOT be voted in again.
70% of Canadian households own property such a law would cool the market and cause valuations to drop. Better believe whichever party is in power when this whole thing comes to a head wont be for much longer.
This is true, but they wouldn’t need to arbitrarily set mortgage rates to have a positive effect. One obvious solution is to dissolve the CMHC. High ratio mortgages would then either not be available, or would command a much higher interest rate without the government backstopping what amounts to a sub-prime loan. Reducing the amount of leverage that Canadians can access would effectively crash the market overnight though so the government will never do this. The government won’t lift a finger for fear of popping the bubble, it’s going to collapse under it’s own weight, or by an exogenous credit shock of some sort.
Why doesn’t the government limit residential purchases to Canadian citizens? Wealthy foreign buyers are driving the prices up and, for many of them it’s just another investment- they have no stake in our country. In addition, institute a graduated capital gains tax to prevent ‘flipping ‘ – based on the number of years of residential ownership . New Zealand has done both of these things . Smart country.
The banks are already doing this with fixed rates. When bond yields go up from inflation they will have no choice as they have “sold” the bonds to other investors and will owe money if they don’t.
Primarily because business investment is low and so is inflation. The BoC want to keep rates low so more people will borrow money to expand or create businesses (i.e. improve economic growth), which will help lower unemployment. Raising rates may help lower house prices, but it would also result in slower economic recovery and higher unemployment.
The BoC has suggested government intervention would be better since the government can target house prices without it hurting business investments. For example, requiring a progressively larger down payment for each subsequent property purchased, increasing capital gains tax on investment properties ect. But the government doesn’t want to do that because it would hurt current homeowners equity (which means they could lose votes if there is an election this year), and it could also hurt the Canadian economy since real estate is over 9% of our economy.
So we are in a stalemate where people without houses are being left behind but no one wants to fix it.
Inflation is not low unless you are referring to CPI which is heavily manipulated and low interest rates are actually having an adverse effect on business investment. All this cheap money is being poured into the stock market, real estate and other financial assets causing massive bubbles everywhere while devaluing the dollar. I understand that the government had to do something to prevent a massive depression but it could have been executed in a much better manner. We are now in a mess and the only way out is to let these bubbles burst but there is no political courage to let it happen. Instead they are now seriously talking about UBI, higher taxes coming and endless money printing. Good luck to all.
Raising rates is suicide when the US is not. Canada is an export country with the majority to the US, and it is *extremely* sensitive to currency fx. Right now the Canadian dollar is already the strongest in the G7 and hurting export business, if you were to raise the rates while the fed doesn’t you would create a brutal recession due to the fx rate on exports.
Yes exactly this. Canada is already flirting with Dutch disease as it is. Further currency strength would just worsen our already hollowed-out economy.
An 80 cent dollar is not Dutch disease. In any case, so-called Dutch disease was more a figment of overactive 1970s imagination than fact. The Dutch ended up adjusting very well to their higher currency and newfound oil wealth.
Some of the rise in prices might be attributed to dirty money that foreigners, residents and citizens alike bring in to launder it through real estate market. Corruption is rife in Africa and Asia. Tenders are allotted based on payouts to politicians and bureaucrats. The top executives of contracting firms inflate the corrupt money bill by manifold. If they pay $5,000,000 to politicians, they inform their head offices that money to be paid is $15,000,000.
The extra $10,000,000 ends up in the pockets of head office CEO and Executives incharge of the project in Africa.
A major part of this dirty $10,000,000 ends up in Canada, USA and Europe.
Governments know this malaise but turn a blind eye to it.
Look around and one can find many houses, apartments and estates lying empty for years.
These are bought to launder dirty money.
It is a catch 22 situation. If Canadian government become strict, they will go to Spain, Portugal, USA or many such destinations.
🏦 + 🖨 = $$$$$$$$ = 🎈🏠🎈 = 💥
enough said
I think the banks need to take the blame for some of the overheating of the market along with real estate agents. The banks should have always stuck to maximum of 25% of yearly income for housing. Not the 50% they’re allowing. The real estate in this country has to reform and make transaction more transparent. Rules are in place now to prevent certain illegal activity but there is no consequences when they get caught. I wish you could do an article how people are able to afford paying 100,000 over asking price. The article you wrote showing average income to average house price in each region doesn’t make sense.
I agree with you, would be nice to see an article like that. Presumably some buyers with larger down payments are lucky enough to have help from the bank of mom and dad. However, I wonder about those who don’t have that type of support available. People who already own are likely using their own equity / HELOC. There’s probably some foreign investments and illegal activity. There’s also a potential some of these are due to investment funds. This is apparently driving up costs in the US, and I wonder how much it happens here. Good (US) news video on this in the link below:
https://www.youtube.com/embed/EBb9zf_zWvU
in the end of the day , Government had failed to protect our young generation and give them the opportunity of buying a home , against the foreign investors and the speculators and others opportunists in the real estate market.
100% They screwed over their people. Wait till inflation really ramps up. It’s only going to get worse.
Not just the younger generation, but anyone who got out of the market for whatever reason (job move for example) and never got back in quickly enough. Or a first time buyer who waited too long because they wanted a bigger down payment ( some 40-somethings for example).
I’ve been thinking about this a lot. What do you think will be the 3rd and 4th order consequences of this over time; politically and economically.
Yeah Canada desperately needs strengthening of public housing and purpose-built rental properties at minimum. I get the fact that these politicians don’t have the balls to get affordability through killing home equity. But they’ve essentially just thrown up their hands and said they can’t do anything.
How about forcing CMHC to actually live up to their mandate of making housing affordable for Canadians, and start building mass public housing? It worked for Singapore I’m sure it would have helped here.
The inaction over the past 20 years by politicians hasn’t been very surprising, but it has been exceptionally disappointing.
The fact is, money creation has been on steroids all over the world. Real estate prices has been going up all over the world.
They should have let prices drop DURING the pandemic. Now the whole world is on their way to recovery, a real estate market crash at this point would destroy the entire economy. They will just allow inflation to go higher for longer.
haha. That’s funny. Other countries are complaining about a 5% increase. Anything with 4 walls in Canada is going for 16-40% more.
High real estate prices are from money creation ended in August. These are buyers encouraged by the government.
What’s the argument against just letting it ride? Either the realtors are right and this is the new normal and we’ll all have to adapt (maybe as more people become life long renters, rental laws will improve, for example, or young Canadians will leave), or Better Dwelling is right and the bubble will pop when it’s time and prices will correct themselves and we’ll all take a punch in the mouth and learn a lesson.
“learn to adapt” yeah I’m not a fan of what that would look like. Non-residential capital investment in the country is lacklustre. Continuing this charade just means more underemployment and crappy jobs. Ideally, our country would have the conditions to become industrious, not hyper-financialized.
I also don’t know where young people would go. Not sure if the US will be as welcoming in the coming years.
UAE, China, parts of Europe. And if our economy becomes hyper financialized, we deserve what we get. I’m not in favour of what’s happening, but I am getting pretty nihilistic. I’d actually like us to all get out hands burned so we learn not to touch the stove. If this is another mild, soft landing like the 2017 bubble, we’ll just do it again.
Also, we speak English and are pretty well educated. The US will take a lot of us for a while still. I know dozens of Canadians under 40 who live in the US now. I was gonna join them but I’m too much of a coward and I regret it all the time
This is a selfish move by the banks to further shield themselves from a likely debt-collapse. They don’t want to “let it ride” because they’re greedy, despite the fact that this might accelerate and amplify the pending correction.
Foreign ownership fuels the fire. Canada should limit residential purchases to Canadian citizens- people who have a stake in our country. In addition speculative purchases should be taxed.
We all need homes. I these practices make it impossible to own one our entire society will be negatively impacted . Do the rich really need to get even richer on the backs of our citizens ?
I think not .
The biggest challenge in Canada is fraudulent mortgages. This is rampant. For a fee, shady mortgage middlemen will get you sub prime mortgages from banks. Looks like representatives in some banks are willing to look the other way, provided their palms are greased. This means people that cannot afford a mortgage are getting one. A large percentage of mortgages are approved this way. If the government puts regulations to stop this crap , housing prices will come down
And yet here I am. Trying to find a rental because genworth has decided that 10% down and 15k set aside for overages is not enough on a home where the payments would be less than 15% of my income. Yet my friend whose broker did some shady stuff is working with movers today on a home that will easily bankrupt his family over the next 3to5 years
Sometimes it feels like they just throw a dart on a picture and if it hits the right part of the face you get your mortgage insurance.
Most bureaucrats thought they are the smartest person in the world and never bother to learn from others — arrogance and pompous.
To solve a tough problem the easiest way is to “copy” or just google which country is best in handling the housing problem and learn from them. And also find out who did the worse and learn from them too.
But will Canadian government do it? Nah, Canada will be part of the “worst handling of housing affordability issues countries”. Every year the affordability index is going down and homelessness worsens, the country is getting to the bottom, when is it happen is anybody guess but it will not be pretty.
How would regulation help though? I work for a bank and we come across fake income docs all the time. I’m sure there are plenty we don’t even catch. I also agree that there are sales people who are participating in this and knowingly booking fraudulent business. They are commissioned with sales targets that MUST be met. So they make money from the bank based on how many mortgages they book and are under pressure to book certain targets amounts. PLUS they also take up to 1% in cash from clients for booking these mortgages. So you can see why things are set up to participate in fraud. The worst that happens when they get caught is they are fired. But 99% resign before being fired and literally go work for another big 5 within days. The bank is clear of fault because they write down policies that must be met and just blame the one individual for not following policy. While setting up an environment to encourage fraud. All this to say, I am not sure the government can do a whole lot about this. Even with an osfi audit, there is zero focus on potential fraud. They just come in and see if you are following your own policies. Did you get the paystub and T4 from the client? No one cares if the T4 and paystub are real or fake. We even see doctored NOA’s. Also, the banks are aware of the filth being booked, the only measure is will this person default? If not, give them the money. The bank I work for gets consulted by cmhc and osfi before those organizations come out with changes so I don’t see hope here unfortunately because everything is set up in favor of the banks and the government will not step up.
With $78k as median income in Ontario and $1M average home price, there is every reason to believe of mortgage fraud and breach of GDS/TDS ratios. But this is not a concern as tax payers (CMHC) are there to take care incase mortgages go bad.
I feel in Canada to be successful one needs to be a fraudster and scammer, people paying taxes have to just worry how to make ends meet.
It is very difficult to figure this out. A $750,000 mortgage has a payment of $3,200 a month (2.1% interest).
Average family nets $5,000 a month at best….
The real problems are mortgage fraud and lack of supply. Better tech can tackle the first and the government should be focusing on policies to address the 2nd instead of endlessly tinkering with the stress test.. which is limited in scope, unfairly penalizes new buyers, and imho is politically driven “see, we’re addressing the issue” .. no you’re not, this is just punting the football 10 yards down the field but the general public sees it as the be-all-end-all. The real issues are not being addressed. The new goal for immigration is 400k people annually (needed for economic growth) , where are these people going to live if we don’t address supply issues?!
But But in Canada its different, we dont just give out loans like those dumb Americans, sure its different alright…it worst.
whats the big deal? home prices go up as long as someone is around who can borrow the money and get it and carry the mortgage. if people want to pay 10k mortages, and rent it out for 4k, so be it. thats their problem.
as long as there are people around who in 5 to 10 years can buy your house for a ton of money you’re fine.
personally, i just don’t see it since the demographics of wealth are changing.