Canadian policy-makers are trying to stabilize a housing market that's on the edge. But what I see coming from Ottawa could tip it right over the edge.
All-time-low interest rates have juiced Toronto and Vancouver home prices to unprecedented heights. That has much of the country worried, and regulators are determined to do something about it.
On Monday, the Finance Department responded yet again. It unleashed two rather subtle but potent new mortgage rules aimed at countering "years of low interest rates." These rules seem to be all part of a master plan.
If mortgage rates were just one percentage point higher, affordability would drop 9 per cent, demand would slow and these concerns would alleviate. But the feeble economy doesn't justify higher rates, from either the Bank of Canada or the bond market. So that leaves everyone looking to policy-makers for answers.
I've heard from a couple of lender executives who attended a Finance Department meeting this summer where officials indicated an intent to raise the effective level of mortgage rates without hiking other economically sensitive rates. Policy-makers have been orchestrating this stealth rate hike through a combination of higher capital requirements, securitization limits, default insurance restrictions and "lender-risk sharing" on insured mortgages.
All of these things make it more expensive for lenders to lend, and no lender wants to eat these costs. Instead, they'll pass them on to borrowers through higher rates. By the summer of 2017, there are views in the mortgage industry that policy-makers could push mortgage rates more than 0.50 percentage points.
Monday's mortgage rule tightening was an extension of these veiled rate hikes, with two policies destined to boost mortgage costs.
The first one affects the "qualification rate" used to assess borrowers. Starting Oct. 17, folks getting a five-year fixed mortgage will have to prove they can afford a payment based on the Bank of Canada's posted rate, currently 4.64 per cent. That's a mighty 2.25 percentage points above today's average qualification rate.
Consider that someone with 10 per cent down, $50,000 of income and no debt can afford a $300,000 home today. Once this new qualification rate takes effect in two weeks, that drops to $246,000, a stunning 18-per-cent plunge in affordability. Many will now be forced into smaller mortgages, assuming they can't find a co-signor or bigger down payment. .
With over 50 per cent of homeowners selecting five-year fixed terms, according to Mortgage Professionals Canada, this rule hits a wide swath of borrowers. In fact, Ottawa's action this time around could weigh on home values more than any of the government's past amortization reductions or down-payment increases.
Refinancers are another group being targeted – specifically those trying to consolidate as much debt as possible into their mortgage. They'll soon need more income to get approved for the very same loan amount. Otherwise, the higher qualification rate will push their debt ratios above lender limits.
The Finance Department's second rule is just as significant. Effective Nov. 30, lenders can no longer insure refinances, amortizations over 25 years, non-owner-occupied rental properties or mortgages over $1-million. That's a problem because insurance is required for lenders who sell mortgages to investors. These lenders and their mortgage-broker armies typically undercut banks, saving consumers billions in interest every year. Banks don't need this insurance, however, so with their competitors disadvantaged, it's an open invitation for banks to increase rates.
Data on the potential impact of these rules are sparse, but preliminary official estimates are that roughly one in 12 new home purchases could be impacted. I'd guess the true number is at least double that, based on past borrower affordability polls.