New mortgage rules will ‘reduce the risk’ a housing crash poses to Canada’s economy

OTTAWA — Canada’s finance minister believes the housing market remains hot, but healthy. It just needs a little more regulatory care to keep it that way and not harm the economy in the process.

For now, Bill Morneau’s prescription calls for some gentle adjusting of existing rules — like closing a tax loophole on non-resident real estate investors — along with new measures, such as a mortgage-rate “stress test” to ensure hopeful buyers can afford to get into the market in the first place and meet their payments when lending levels begin to rise.

“Overall, these measures should reduce the risk of a knock-on to the Canadian economy from a possible correction in Vancouver and Toronto,” said Sal Guatieri, senior economist at BMO Capital Markets, following the minister’s announcement of the changes on Monday.

“There’s enough here (in the new rules) to slow the markets — especially foreign demand in those markets,” Guatieri said. “But what these measures will also do is reduce the risk of a correction down the road should prices in those two cities continue to rise at double-digit rates.”

Both the federal government and the Bank of Canada have been attempting to cool the housing market in the post-recession environment of low-for-longer interest rates. Ottawa has attempted to rein in the market through progressively tighter regulations on the length and levels of mortgages, particularly in Vancouver and Toronto where prices of homes have been on a steady upward trajectory — even as interest rates have remained at near-historic lows.

Stephen Poloz, the central bank governor, has been at pains to remind Canadians that rates will eventually begin to go up and borrowers need to stay within their ability to manage mortgages at higher rates. 

Changes announced Monday, which come into effect Oct. 17, will “certainly add some prudence” to the housing markets … by beefing up the so-called mortgage stress qualifications,” Guatieri said.

“It clearly will price-out buyers in some high-priced regions in Canada — obviously Toronto and Vancouver. So, that will go some ways, I believe, to cooling the markets in those two regions.”

Even before the measures were announced those two markets were showing signs of slowing down.

Phil Soper, chief executive at Royal LePage, said “we are already starting to see the early stages of a cyclical slowing of the market in both cities — albeit more pronounced in Vancouver.”

“For the rest of the country, I believe we’re actually in a natural expansionary phase and will probably see very little change or slowing … anywhere but in our two biggest cities,” he said.

The government in Ottawa — and in British Columbia, which has also brought in tougher guidelines on the residential market — need to be “very, very careful when they implement new policy (as it) could damage what is now the economic driver of the Canadian economy.”

“(But) I believe they have reached a balance,” Soper added. “They’re sending the right messages.”

Meanwhile, the body representing the country’s financial sector said it agreed with Ottawa’s objective of “ensuring Canada’s housing markets remain strong, stable and resilient, and that there are no quick fixes.”

“We are currently reviewing the changes to the mortgage and housing markets announced by the federal government … and discussing them with our members to determine the potential impact of these measures,” the Canadian Bankers Association said in an email to the Financial Post.

“Banks in Canada are prudent lenders that manage risk carefully,” the CBA said, adding that financial institutions “already do extensive stress testing on their mortgage portfolios to ensure that their clients have the ability to repay their loans even if interest rates increase.”

Source:  Gordon Isfeld | October 3, 2016 6:37 PM ET

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