Demand for housing could be cut anywhere from five to 10 per cent because of tougher qualification rules being considered by Ottawa, according to a report by Toronto-Dominion Bank out Monday.
The report from Beata Caranci, chief economist with the bank and Diana Petramala, also an economist, takes aim at a proposal from the Office of the Superintendent of Financial Institutions.
The federal banking regulator is looking to crack down on non-insured mortgages – impacting people with at least 20 per cent down – by making those consumers qualify based on a rate 200 basis points above what is on their contract.
“Government policymakers are not done yet with regulatory changes on the mortgage market,” the pair wrote in their 13-page report, noting income testing is currently used for high-ratio mortgage loans backed by Ottawa.
“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 authors said, as the proposed measures will act as another force that limits price growth in the future.
Those consumers, who often have as little as five per cent down, must qualify based on the posted five-year rate of the Bank of Canada, which is currently 4.84 per cent.
The economists suggest changes to tighten the rules on non-insured mortgages will lead buyers to “come up with a bigger down payment, opt for a lower priced home and scale back other debt,” and may even delay purchases all together.
As part of the report “Navigating a Soft Landing”, the economists looked at the “unprecedented” number of policy changes over the past 18 months.
Other key changes implemented by Ottawa included increasing the minimum down payment on homes worth more than $500,000 and reducing portfolio insurance, a program that allowed financial institutions to securitize loans they deemed risky, but not legally required to be insured.
“Each successive regulation change at the federal level has left a smaller mark on home buying activity,” the economists wrote, noting the most recent changes from Ottawa during that 18-month period may have only shaved two per cent off of demand.
Previous changes, beyond the ones OSFI is currently considering which the real estate industry has asked Ottawa to put on hold, have been aimed at the insured market. The problem is new loans that require mortgage insurance are less than 20 per cent of all new chartered bank mortgage originations, down from 40 per cent in 2008. Recent rule changes impact the insured market but it is increasingly a smaller part of the overall market.
It is provincial changes that are having more of an impact on the housing market according to the TD economists, pointing to a 15 per cent tax implemented on foreign buyers in the Vancouver and Toronto area markets by their respective provincial governments. Vancouver has bounced back somewhat, and while the pair downplayed the impact of foreign buyers in Toronto, they said “domestic speculation” was a key factor.
While buyers may be hoping rising interest rates could trigger a crash, those first-time buyers “may be holding their breath for a while” because prices are likely only going to reset back to the levels of where they were before a year of exorbitant gains, the report concludes.
“Listings shot up in the GTA following the policy measures not because homeowners suddenly became incapable of affording their homes but because speculative activity is being squeezed out,” they wrote.
The economists said soft landings can happen and maintain Vancouver is the “poster-child” as, since 1990, the city has had five cycles where prices ran up anywhere from 15 to 20 per cent and corrected shortly afterward by 10 to 14 per cent.
In the GTA, they expect the current pullback in prices to be sharp and short with levels returning to where they were in mid-to-late 2016, noting average prices are down about 13 per cent from their peak. They expected another six per cent in price declines in 2018 in Toronto
Source: Financial Post/Garry Marr