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Having already suggested the Bank of Canada may have to do an about-face on a move to hike the overnight rate, Capital Economics economist David Madani is now issuing another warning.
But this time around, it isn’t the central bank that’s caught the attention of the senior Canada economist for the London-headquartered economic research consultancy.
The Office of the Superintendent of Financial Institutions (OSFI), the government financial regulator — and its headline-grabbing plans to introduce a stress test for all uninsured mortgages — is the subject of his commentary.
“Tougher mortgage rules will only make matters worse for the already faltering housing market,” Madani wrote in the Capital Economics’ latest Canada Economics Weekly.
Madani figures the move, in the works for some time, will slash the average price of a Canadian home by up to 15 per cent.
Growth in the average price of a home has already been grinding to a halt of late, with prices in October only up 2.8 per cent from a year ago, according to the Canadian Real Estate Association.
Exact specifics are not public yet, but OSFI has recommended home shoppers applying for an uninsured mortgage should have to qualify against a rate that is at least 2 per cent higher than what they are signing up for.
An increase in the five-year mortgage qualifying rate to 4.89 per cent from 4.64 per cent has already cut what the majority of possible first-time homebuyers can afford by 2.4 per cent, Madani calculates.
“The proposed mortgage stress test on uninsured mortgages would obviously have a much greater impact on the housing market,” he writes.
Madani, often a contrarian, is not alone in warning of the impact that qualification tightening for the uninsured segment of the mortgage market could have on the economy.
In fact, in a report published earlier this summer, CIBC Deputy Chief Economist Benjamin Tal said, “The proposed rate qualification regulatory changes… have the potential to notably slow down growth in mortgage originations.”
Tal went so far as to suggest it may be best to hold off on introducing the more stringent process, noting that the quality of Canadian mortgages wasn’t in question at the moment.
“Given current slowing activity in the market, it might be advisable to rethink the timing of the implementation of those policies,” he wrote.
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Making applicants for uninsured mortgages qualify at a rate that is 200 basis points higher would trim annual outstanding mortgage growth by two percentage points. He pegged annual growth at a rate of 6 per cent.
“Too severe rate-induced slowing in consumer spending and real estate activity could be recessionary, and eventually turn the growth story into a credit quality story,” Tal added.
That, it’s worth noting, was in July.
Since then, Canadian home prices have fallen further. This has been largely a by-product of housing markets in Ontario adjusting to the provincial government’s Fair Housing Plan, which contained a foreign-homebuyer tax for the Greater Golden Horseshoe as well as broader rent control.
OSFI says new rules will appear before the year is out, leaving observers, including Madani, speculating on specifics.
“Although the final details aren’t known as yet, Superintendent Jeremy Rudin indicated they would be broadly consistent with the draft proposals,” he says.