The Canadian government should consider being flexible on its new mortgage lending rules because the impact has been longer-lasting and more significant than originally intended, Toronto-Dominion Bank says.
Home sales were about 40,000 lower between the final quarter of 2017 and the same period a year later than they otherwise would have been without the rules, according to a note to clients Tuesday by TD economists Rishi Sondhi, Ksenia Bushmeneva and Derek Burleton. That translates into about a 7 per cent decline in sales, they said.
There is also evidence of a shift in business to private lenders who are not subject to the rules, known as B-20 and implemented by Canada’s banking regulator. The economists estimate the share of borrowers in Toronto accessing funds from alternative lenders increased to 8.7 per cent in the second quarter 2018, from 5.9 per cent in the same quarter a year earlier.
The changes mean federally regulated lenders must now run a 200 basis-point stress test on new mortgages, to ensure the quality of lending remains high amid escalating home prices. The measures are disproportionately affecting first-time homebuyers, who normally account for between 40 per cent and 50 per cent of the market, as well as cities that have more youthful demographics like Toronto and Vancouver, TD said.
“Right now it’s a one-size-fits all type of policy, and borrowers differ in their ability to service their mortgage, and they’re different in terms of their risks,” Bushmeneva said in a phone interview. She said policy makers could consider being flexible around the 200 basis point stress test limit, given it’s “somewhat arbitrary,” and doesn’t take into account the credit-worthiness of borrowers or their life stage.
B-20 mortgage stress tests too severe, need to be more flexible: CIBC’s Tal
A CIBC report is calling for regulators to revisit the B-20 mortgage stress test. Benjamin Tal, deputy chief economist at CIBC Capital Markets, says regulators are trying to fight supply issues with demand tools and that the stress tests won't help affordability for homebuyers.
Immediately removing the rules would increase Canadian home prices an additional 6 per cent, on top of Toronto-Dominion’s current forecast for a 4 per cent increase, by the end of 2020, the economists wrote, adding that would boost home prices by about $32,000 on average.
The rules have pushed potential buyers into the rental market, leading vacancy rates for purpose-built rental units to fall by as much as 30 basis points in Toronto and Vancouver. That poses a “significant challenge” as those markets are already “severely under-supplied,” with current vacancy rates at just 1 per cent, the economists wrote.
Toronto-Dominion joins fellow-lender Canadian Imperial Bank of Commerce, along with realtors and builder groups in calls for the government to revisit its B-20 rules.
According to the note, Toronto-Dominion also forecasts:
- Housing starts to trend lower through 2020, as B-20 crimps market for new housing
- New housing construction will be a drag on growth next year, though healthy job gains and robust population growth will provide a floor. Currently, the bank sees Canadian home prices stabilizing by mid-year and rising 4 per cent by end of 2020
- However, if B-20 was immediately removed, nationwide sales and prices could be about 8 per cent and 6 per cent higher by end of 2020, equating to about $32,000 difference in avg Canadian home price, with disproportionate impacts in Toronto, Vancouver.
- Removal of B-20 would represent a “significant near-term boost to housing activity, though at a longer-term cost of worsened affordability”