The real estate industry is “holding its breath” as regulators look to extend tough mortgage rules in the face of a sharp slowdown in the country’s largest market.
Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, is taking aim at the uninsured mortgage market – where homeowners make a down payment of 20 per cent or more. OSFI is proposing stringent stress tests for those borrowers, in line with what’s already happening in the insured market.
The period for public comment on the proposal - formally known as Guideline B-20 - ends on Thursday, but the industry is already sounding the alarm over the potential fallout.
“There is a concern that there has been too much change, too quickly,” Lauren Haw, CEO of online real estate portal Zoocasa, told BNN in an email.
“The industry is already holding its breath to see if the typical back-to-school buyers return in the fall, and this would only serve to further slow the market.”
Toronto, the last hot market left standing until this spring, is in rapid cool-down mode following government intervention. Sales have plummeted and the average selling price is 19 per cent below the record highs of April.
“We need to question whether regulators want to add momentum to this slowdown,” James Laird, co-founder or RateHub and president of Canwise Financial, told BNN in email.
By his math, the more stringent stress test will cut a potential homebuyer’s purchasing power by some 18 per cent.
Laird provides the following example:
A family with an annual income of $100,000 with a 20 per cent down payment can currently afford a home worth $792,813 (based on a 2.64 per cent mortgage rate and accounting for property tax and utility costs).
If stress-tested to qualify at 4.64 per cent, that same family would afford $146,579 less home.
Laird sees three potential consequences of a more stringent stress test: borrowers may turn to family for loans to qualify for the property they want; some will adjust their expectations; and some simply won’t buy.
Then there’s always the shadow banking industry.
“If this stress test goes through as it currently reads, it would cause a large number of current borrowers and buyers to be pushed into alternative and subprime mortgages,” Bruce Joseph, principal broker at Anthem Mortgage, told BNN via email.
Still, Joseph says Guideline B-20 is the kind of tough medicine the housing market needs.
“This sector typically has much looser standards, and a large scale push towards more prudent lending at this point - although negative for home prices - is a move towards long-term stabilization in the financial system,” said Joseph.
“If they were in place prior, it would have prevented many of the structural economic issues we now face.”