Mortgage stress tests may be in need of a 'tweak': RBC's McKay

The chief executive officer of Royal Bank of Canada says the contentious mortgage rules introduced in January 2018 could be tweaked now that the country’s housing market has cooled, but says the regulations are still needed overall.  

“When we didn’t have the monetary policy to slow [the housing market] down, we needed to look at prudent regulatory policy. And I think vetting consumers for a higher interest rate environment was prudent,” David McKay told BNN Bloomberg’s Greg Bonnell Thursday.

“But like every policy, it’s not static,” McKay added. “As things slow down, maybe you have to re-look at parts of it and tweak it. But from a structural perspective, it’s prudent regulatory policy.”  

McKay’s comments come amid a growing chorus of industry voices calling for regulators to revisit the so-called B-20 guideline introduced by the Office of the Superintendent of Financial Institutions. They argue the requirements are too stringent, making it difficult for some Canadians to buy homes. The guideline, which is mandatory for federally-regulated lenders, requires homebuyers who put down at least 20 per cent to be able to cover their payments at the Bank of Canada's five-year benchmark rate or two per cent above their actual mortgage rate.

“It’s not arbitrary,” McKay said. “Thought obviously went into what is a relatively prudent stress [test] of an interest payment. But you have to put it into the context of where markets are, and those are the things that you can look at, whether it’s sufficient or potentially too stringent [policy] given where absolute rates are.”

“But 200 basis points in the context of long-term rates is not a significant step up in rates. So I would say it may be off a bit, but structurally, it’s a strong buffer to make sure we have healthy markets going forward.”  

McKay noted that since the mortgage rules took effect, home prices have generally cooled and some prospective buyers have temporarily steered clear of the market as they save for a bigger down payment. He expects there to be slightly less home creation in condo and single-family markets in the coming year due to potentially slowing demand.  

Sales activity in the once-hot Vancouver market, for example, has slowed dramatically in recent months and the region’s benchmark home price in June fell below $1 million for the first time in two years.   

“We continue to monitor all the supply and demand signals coming out of the housing market – by market,” McKay said. “And I would characterize us still in well-balanced territory.”