In a bid to curb new mortgage applications in an effort to cool down the sizzling Canadian housing market, the OSFI has increasingly tightened regulations, particularly qualifying factors, regarding mortgage applications.
The Bank of Canada itself estimates that the newest line of rules that come into effect January 1, 2017 will disqualify an additional 10% of prospective borrowers.
Known as the B-20 Guidelines, the newest draft of rules which have been made public on October 17, 2017 and often called the “B-20 Bombshell”, will introduces measures such as a “stress-test” and stricter LTV’s.
The so-called stress-test is the real biggy as it alone is estimated to have the potential to reduce qualifying borrowers by up to 10%. It requires that borrowers are measured against being able to withstand an interest hike of 2% which is quite steep considering interest rates average at around 3-4%. This stress-test is already mandatory for high-ratio mortgages (mortgages with less than 20% down payment) but will now also be extended towards low-ratio mortgages.
The Bank of Canada has pointed to the rate of rise in housing costs slowing by as much as 10% in the last year as proof that stricter lending requirements can help reign in rapidly rising housing costs.
Why the harsher regulations?
The answer is a pretty simple won. The basic principles of economics say that by decreasing demand their would naturally be a surplus of supply that leads to a lowering of prices. The government and all it’s fingers see tightening mortgage regulations as one of the avenues to curb demand (if we remember that demand is not only consumers who want something but that also qualify for it).
In the real world, however, things are never really that simple. These regulations have also made it impossible for many who were able to get financing 10 years ago to refinance or get new financing now in 2017. That led to many homeowners staying put and not moving for new people entering the marketplace.
This means that it has so far not had the desired effect even though it has slowed down the pace of rising costs. Prices did also take a hit in cities like Toronto and Vancouver when a tax was imposed on foreign buyers.
The new round of tighter regulations is meant to build on this and hopefully lead to more pronounced results in 2018 and beyond.
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Will it have the desired effect?
The jury is very much out on this one. Across Canada, housing costs are already at well over C$300,000, excluding hotspots such as Vancouver and Toronto. It’s at over C$500,000 with them included. And although the rate of rising prices has slowed by almost 10% in most areas, the actual rise in value is still more than 10% per year (15% for some housing types).
Many argue that it’s too little too late and that it will take decades to get the rising costs under control and then back to a reasonable number.
It’s also still to be seen what kind of effect a growing private mortgage lender industry would have on the overall mortgage industry. As of now, it’s a growing sector that’s cashing in on tightening regulations in the federally regulated domain, however, they haven’t quite had the growth most were expecting. Consistently high interest rates and product models that haven’t changed much are the chief cause.
That being said, if a few of the bigger players seize the opportunity presented by the new rules in the coming year, we could witness some significant growth which might lead to better mortgage rates through increased competition.