New Mortgage Rules Set to Further Cool Markets Up To 10%

Real estate prices to be hit by imminent expansion of mortgage stress test, says TD Bank

Canada’s two key real estate markets, Vancouver and Toronto, where some sectors are already cooling in terms of sales and prices, could be further affected by new mortgage rules soon to come into force, according to TD Bank.

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In its report “Navigating a Soft Landing” issued August 28, the national bank said that home prices in some areas of the cities could fall by up to another 10%, as the mortgage qualification rules being tightened this fall by the Office of the Superintendent of Financial Institutions (OFSI) further reduce all home buyers’ purchasing power.

Previously, the mortgage “stress test” introduced last fall only applied to those with insured mortgages, with less than 20% down payment, and required those new mortgage applicants to qualify at a much higher rate than the one they would actually be paying. This fall, OFSI is expanding this rule to require all new mortgage applicants to qualify at the higher posted rate (currently 4.64%), even if they have more than 20% down and an uninsured mortgage.

This strict new rule will mean that the purchasing power of many home buyers will be dramatically reduced as they will qualify for a lower mortgage than they can afford – and this could have a knock-on effect on home prices, said TD chief economist Beata Caranci and economist Diana Petramala.

“Government policymakers are not done yet with regulatory changes on the mortgage market,” wrote the report authors. “In the year of implementation, we estimate that this new rule could depress demand by 5% to 10%, and shave 2% to 4% off of our current forecast for the average price level in 2018.”

The economists said that the changes could mean buyers will have to “come up with a bigger down payment, opt for a lower priced home and scale back other debt” – and added that some would-be buyers may choose not to purchase at all.

However, those buyers who are hoping that prices will drop significantly to affordable levels “may be holding their breath for a while,” said the authors, suggesting any decreases would merely reset prices to pre-2016 levels in a “soft landing” rather than a price crash.

Caranci and Petramala said in the report that there had been an “unprecedented” level of federal intervention in the housing market over the past 18 months. These changes included last fall’s mortgage qualification stress test and the increase in the minimum down payment on the value of the purchase price of a home above $500,000, among other policies.

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