Canada’s bank regulator has proposed an even tighter mortgage qualification rule in a bid to cool the booming real-estate market, thereby making it more difficult for home buyers to secure financing.
The Office of the Superintendent of Financial Institutions disclosed it will setup a new benchmark interest rate used to determine whether people can qualify for uninsured mortgages. Home buyers will now be required to show they can afford a minimum rate of 5.25%. The current threshold, based on posted rates of Canada’s six largest lenders, is 4.79%.
Paul Taylor, head of Mortgage Professionals Canada, an industry group, said he’s skeptical the move will make much of a difference given high levels of investors entering the market who won’t be impacted.
“Even with these measures in place I don’t think you’re going to see the housing market really calm down,” Taylor said.
The move comes amid a surge in housing prices that’s raising concern among policy makers and economists. Cheap mortgages and new remote-working conditions have spurred a frenzy of demand for more spacious homes, with house hunters bidding up prices across the country.
The Canadian Real Estate Association calculates prices are up 17% nationally over the past 12 months. Twelve major markets — or about one quarter of the total — have posted price gains of more than 30%.
The tighter qualification restrictions will reduce the buying power of households by about 4.5%, according to estimates by Derek Holt, an economist at Bank of Nova Scotia.
OSFI said housing market conditions “have the potential to put lenders at increased financial risk,” forcing regulators to take “proactive action.” The regulator said it will revisit the calibration of the qualifying rate at least once a year to ensure it remains appropriate. The plan is to implement the changes on June 1, after consultations.
The move impacts the uninsured mortgage space that is overseen by OSFI. The federal government is in charge of mortgage qualification for insured mortgages. There was no indication in the statement that the government planned to follow the move, and requests for comment from the finance department weren’t immediately returned.
One unintended consequence could be to temporarily accelerate the market as buyers rush in before the changes are implemented.
“We may well see an even hotter spring housing market as a consequence to OSFI’s move,” Holt said by email. “We’ll get more pulled-forward demand.”