Mortgage Changes May Accelerate Canadian Property Bubble, Not Helpful: Big Six Banks

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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