Photo: James Bombales

With many industry players predicting a housing market slowdown for Canada heading into 2018, one economist is blaming the potential cooling on recently introduced regulatory measures.

“In Canada, the much-discussed risk of a housing slowdown is derived not simply from the traditional mix of higher rates and/or higher unemployment — regulatory changes are arguably the most powerful consideration of all,” writes RBC Global Asset Management chief economist Eric Lascelles in his latest weekly #MacroMemo.

Lascelles is referring new mortgage rules announced by the Office of the Superintendent of Financial Institutions (OSFI) last week.

From January 1st onwards, a new mortgage stress test will require all uninsured mortgage borrowers to qualify against the Bank of Canada’s five-year benchmark rate, or at their contract mortgage rate plus an additional 2 per cent.

The new rules are intended to ensure that uninsured borrowers can withstand higher interest rates. The overnight rate – which influences mortgages and was at a historically low 0.5 per cent earlier this year — has been raised 50 basis points since July, with some predicting a third hike in December.

According to Lascelles, while the move could potentially boost housing demand in the short term as buyers rush to purchase before the rules come into effect, it will ultimately cool the market in 2018.

“It promises to notably cool the Canadian housing market, as around 10 per cent of mortgage applicants will be limited in their purchase options by the new rule, reducing the home they can afford to buy by an average of 15 to 20 per cent,” he writes.

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Lascelles predicts that the new rules will play out in a mix of both lower prices and diminished activity.

He isn’t the only economist wary of how the measures could affect the market in the coming months. Speaking with BuzzBuzzNews last week, CIBC Senior Economist Benjamin Tal said the changes would be bad news for an already slowing market.

“This change will certainly slow down demand, and with it the market,” he said. “The question is not if it will affect the market, but how much.”

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