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Be Careful What You Wish For: Did Canada's Housing Policies Go Too Far?

Written by Posted On Monday, 06 August 2018 13:33
Be Careful What You Wish For: Did Canada's Housing Policies Go Too Far?

After years of low interest rates that led to record home buying and price appreciation in Toronto and Vancouver, new mortgage qualification rules were introduced this year to slow down the market and rein in consumer debt. But with interest rates on the rise and high prices creating affordability issues for buyers, critics in the mortgage and real estate industries say the measures have gone too far.

A new report by economist Will Dunning for Mortgage Professionals Canada says "100,000 Canadians have actually been prevented from buying a home as a result of stress testing now required by the federal government (even though they could have afforded to buy based on their actual circumstances)."

He says while higher interest rates have contributed to a slowdown in the housing market, it "has been more severe than we should have expected. The primary cause is government policies that are making it much more difficult for Canadians to achieve their reasonable housing goals."

His report concludes that "by about the end of 2021, employment in Canada will be about 200,000 lower than it would otherwise have been, as the result of the mortgage stress tests. The economic impacts will differ across the country."

The stress test requires buyers to qualify for a mortgage at federally regulated financial institutions at two percentage points more than contracted rate. The rule was introduced by Jeremy Rudin, head of the Office of the Superintendent of Financial Institutions (OSFI), and was instituted on Jan. 1, 2018.

"We clearly see the potential risks caused by high household indebtedness across Canada, and by high real estate prices in some markets," said Rudin before the regulations were finalized. "We are not waiting to see those risks crystallize in rising arrears and defaults. Rather, we are adapting our standards to new developments."

Sherry Cooper, chief economist for Dominion Lending Centres, says the Canadian economy's mix of growth "has shifted from housing and consumption to exports and business investment -- the desired result of the many tightening moves introduced by the government, the central bank and the regulators to slow the rise in household debt."

Even before the stress test rules came into effect, home sales were dropping. Canada Mortgage and Housing Corp. (CMHC) says there were 234,000 new mortgage loans opened in the fourth quarter of 2017, a drop of 7.7 per cent compared to the same quarter in 2016.

"Rising interest rates coupled with decreasing home sales contributed to the decline in new mortgage originations, slowing the growth of total mortgage debt in Canada," says Maxim Armstrong, CMHC's manager, socio-economic analysis. Mortgage delinquencies have been falling for several years, and this trend continued. Maxim says, "Overall, given the lower delinquency rates and the falling share of consumers having experienced a credit degrade, vulnerabilities related to mortgage holders remained low."

Not surprisingly, Dunning and Mortgage Professionals Canada were unhappy when the stress test regulations were introduced.

Dunning says in Toronto and Vancouver, the weakened real estate market "has been seen as a welcome change, though elsewhere in the country it has proven to be more unstable, where conditions were already soft and price stability is being replaced by price erosion.

"The effect of these policies is especially concerning in areas that are already dealing with economic instability, notably Alberta, Saskatchewan and Newfoundland and Labrador, which are struggling to recover from the oil price shock," he says. "The worsening divide between housing supply and housing demand is further degrading the confidence consumers have in the economy and in housing."

Dunning says, "In a modern economy, one of the most dangerous incidents that can happen is falling house prices."

This is because the loss of home equity will prompt consumers to stop spending in other sectors and will cause slower economic growth and job creation.

"There is an important way in which housing markets appear to behave contrary to theory: while we normally expect falling prices will cause demand to increase, a drop for house prices is more likely to cause reduced demand, because potential buyers will hesitate to buy if they fear prices will fall further. This set of factors can result in a downward spiral, in which soft conditions in the housing market can turn into an economic crisis," Dunning says.

Gregory Klump, chief economist for the Canadian Real Estate Association, says the OSFI's mandate is to protect Canada's financial system from risk. "It pays absolutely no mind to how tighter mortgage regulations may affect home sales activity or prices," he says.

Home buyers can avoid the stress test by using lenders that are not federally regulated, such as credit unions or private lenders, but they will be charged higher lending rates, Klump says.

He adds that although the idea behind the stress test is to reduce the likelihood of a credit crunch if Canada is subjected to an economic shock, "It's well understood that international financial markets are highly integrated. An unexpected jump in Canadian interest rates due to an increase in international interest rates would spell bad economic times for Canada. The inability of more prospective mortgage applicants to qualify for financing due to the stress test would make a bad economic time that much worse."

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Jim Adair

Jim Adair is editor of REM: Canada's Real Estate Magazine, a business publication for real estate agents and brokers. He has been writing about Canadian real estate, home building and renovation issues for more than 30 years. You can contact Jim at

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