(Bloomberg) -- Strict new mortgage rules that have helped send Canadian home sales to a five-year low are little more than a flesh wound, according to Royal Bank of Canada.
“We had never really believed that this would be a significant impact on our mortgage business," Neil McLaughlin, head of Canadian banking at the country’s second-biggest bank said Thursday on an earnings call. “We’re seeing minor skew to the portfolio, but nothing significant."
McLaughlin reiterated Royal Bank’s earlier guidance of targeting “mid single-digit" mortgage growth even with a housing slowdown and implementation of tougher mortgage qualifying rules by regulators in January. The measures, known as B-20, require borrowers to qualify at the greater of the Bank of Canada’s five-year benchmark rate or 2 percentage points higher than a bank’s offered mortgage rate. The Bank of Canada rate has jumped 35 basis points this year, to 5.34 percent.
Still, the new standard may start affecting demand for new home loans, McLaughlin said.
“In terms of originations, we’re up year-over-year for the first half of the year, but we are looking for that trend to start to slow down in the back half of the year," he said, adding that the bank remains comfortable with its earlier estimate of a 5 percent decline in new mortgages this year.
Stress Tests
Chief Financial Officer Rod Bolger said the bank had already been tightening its own lending standards before the new rules hit.
“We had adopted stress tests on interest rates -- given the low-interest rate market that we’re in -- over two years ago," Bolger said. “So the stress test from the interest rate was not going to be a big factor for us."
Bolger said he expects downward pressure on mortgage growth given a “normalization" in Toronto and Vancouver housing markets, though there’ll also be upward pressure on overall housing because of “quite strong" immigration and home construction.
“The resale market might be a little bit lower, but the overall housing market is strong," Bolger said.
To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net
To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Jacqueline Thorpe, David Scanlan
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