According to Doug Porter, who is a chief economist at the BMO financial group, lengthened mortgage stress testing can lead to a pretty serious dampening effect on the entire housing market – and the whirlpool could potentially swallow move-up buyers.
As per the latest mortgage lending regulations passed on Tuesday by the Office of the Superintendent of Financial Institutions (OSFI), the restrictions announced could drag interest rates in the slow lane in 2018 if the Bank of Canada delays an evaluation and assessment of how hard the new borrowing rules will be.
Under the rules for the latest mortgage restrictions, home buyers who do not need any insurance on their mortgage as they have made a 20% down payment, will be required to furnish proof that they will not miss payments on their homes when and if the interest rate increases above the 5-year benchmark rate that was published by the Bank of Canada, or 2% more than what their actual contract mortgage rate is.
Doug Porter continued to state that these laws are far more wide-ranging and could potentially dampen the entire housing market next year, which could be even more frightening than earlier federal countermeasures.
The mortgage restriction guidelines that were published as a draft release on Tuesday by the OSFI will be put into effect January 1st, 2018.
According to a thorough statistical analysis performed by Mortgage Professionals Canada, it was revealed that that the new rules will, at a minimum, disqualify 1 out 5 of potential home buyers.
There is no question that move-up home buyers will be affected disproportionately. This is primarily because of the fact that those home buyers will have home equity, which easily qualifies them for applying for uninsured mortgage.
Porter also noted that a majority of people who were buying homes for the first time in Vancouver and Toronto were able to find different ways – through either monetary gifts from their parents or various other sources – to become eligible for uninsured mortgage loans when 2016’s mortgage stress test was launched for applicants that had insured mortgage.
Doug Porter was able to estimate that 2016’s restrictions were able to take 5% to 10% buying power from the entire housing market. The new OSFI restriction has the potential to do the same.
As per the economic speech by Porter to the BILD (Building and Land Development Association) on Tuesday, he stated that there is a good chance that the central bank will not increase interest rates again towards the end of 2017.
The reason as to why they won’t increase rates this year is because of the OSFI guidelines. Balancing between the uncertainty surrounding NAFTA and OSIF guidelines, there is a pretty good chance that the central bank will delay raising rates at this point.
As it is speculated that Canada’s economy will become a bit slower in 2018, the underlying elements of the housing market will be as strong as ever.
Porter maintained that Canada has good popular growth, the interest rate is comparatively lower and the rate of unemployment is gradually going down. Canadian buyers are quite confident, so it isn’t as if the new mortgage regulations is a stake in the heart of the market, but there is a question it will stir up the housing market quite significantly.
Uninsured mortgages rose from 45% to 46% this year – and accounts for a total of $1.5 trillion in outstanding mortgage credits. The data was posted by the Bank of Canada. The Office of the Superintendent of Financial Institutions has been snaring underwriting procedures and standard for home loans these past 5 years, primarily because federal and provincial governments have respectively launched market cooling strategies in both Toronto and Vancouver.
(630) Superintendent Jeremy Rudin, stated that the mortgage mandate is more focused and based on the financial safety for financial institutions that are federally regulated. He also went on to say that he may revisit the stress-test measures in light of the change in market trend and conditions.
Currently, the new mandate will affect a total of 905 area communities – and they will be hit hard. As the lending regulations state that the home buyers will be able to buy less-house, they will not be able to afford the next step in the path to owning a house as the years progress.