In its recent review, the Bank of Canada identified the growing levels of household debt and increased prices in Toronto and Vancouver as concerns. Despite these concerns, the bank remains confident in the resilience of the financial systems and in the growing economy.
Federal Government Changes to Legislation Governing Mortgages
In October last year, the federal government changed the mortgage insurance acceptance ruling, making it more difficult for lenders to access this insurance. The central bank, the government and the CMHC all have a common objective of reducing the levels of household debt and maintaining high levels of stability in the property market.
The changes to the eligibility ruling have resulted in a substantial reduction in the debt to income ratios in Canadian households. It has also resulted in a substantial increase in uninsured mortgages. A problem that the bank now has in its sights.
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HELOC’s Under Review
Also under review is the use of HELOCs, the increased use of which is adding to the indebtedness of Canadian households. The bank has pointed out that since early 2016 the use of HELOCs has increased beyond the growth of income and that this form of credit now accounts for ten percent of household debt. The Financial Consumer Agency of Canada recently expressed concerns that the increased use of HELOC’s could be could be putting households at risk of over borrowing.
Some believe that the Department of Finance may decide to implement similar stress tests on uninsured mortgages as currently apply to insured mortgages. If this were to take place it would definitely have a dampening effect on the housing markets in Toronto and Vancouver, but it is also likely to have a negative effect on other areas in the country where there is no problem. Changes to legislation might not be necessary if the Central Bank simply raised interest rates.
An Increase in the Number of Uninsured Mortgages
The Bank of Canada has realised that the recent changes have affected lenders of insured mortgages negatively. The resultant growth in the number of uninsured mortgages is an opportunity for private mortgage backed securities can fill. The Central Bank’s half annual report appears to back a move away from the CMHC insured mortgages. There was a further surprising suggestion that it would support structured private securitization.
Higher Interest Rates Will Remain in Place for the Foreseeable Future
As long as the central bank considers the housing sector to be a threat to the Canadian economy, the government will continue to watch the levels of household debt and mortgage activity in the market.
Canadians have enjoyed a decade of low interest rates and there has been no increase in rates for seven years. Now the Central Bank has raised interest rates twice in the last three months and is likely to continue to raise interest rates whilst it remains concerned about high household debt ratios. The use of HELOCs is increasing and now accounts for ten percent of household debt. The recent changes to mortgage regulations are a response by government to high levels of household debt and concerns over increasing interests rates.
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