Last week, the Office of the Superintendent of Financial Institutions (OFSI) introduced new rules on mortgage lending to take effect next year.
OSFI will set a new minimum qualifying rate, or “stress test,” for uninsured mortgages. These are mortgage customers with down payments 20% or greater than their home price.
The rules will now require the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada (presently 4.89%) or 200 basis points above the mortgage holder’s contractual mortgage rate.
According to a report from TD Bank, this action could result in cutting demand for housing anywhere from five to ten per cent.
Are we sure there is a problem to solve?
All Points Relocation Canada thinks that this is a reasonable question, because we have just been through the implementation of a foreign buyer’s tax for both Vancouver (albeit quite a while ago) and for the Greater Golden Horseshoe Area. All Points Relocation Service just reported on these.
We have also seen two Bank of Canada ¼ point interest rate hikes within the last few months with more to come. Does OFSI really have to take this action?
When it comes to Toronto in August, the Toronto Real Estate Board (TREB) reported that the average cost of a home in August was down about 20% or $187,000 since the April announcement (it was still up 3 per cent compared to August 2016).
The total number of home sales in August also fell, 34.8 per cent year over year.
It is still too early to see if the changes are going to have a lasting effect on Toronto. There is evidence that the downtown core may be climbing already.
And then there is the lesson of Vancouver.
When it comes to Vancouver the same style of foreign buyer’s tax was brought in and even a vacant home tax. The changes seemed to have immediate effect, with prices dropping, although some pointed out that there had already been some softening. The Huffington Post reports, “the average resale house price in the Greater Vancouver area is now approximately $70,000 above the peak price prior to the market intervention last year, demonstrating that the impact of the foreign buyer tax was temporary.”
We suspect the same may be happening in Toronto.
But as pointed out about above there are likely more interest rate hikes coming our way, which will dampen demand. The real problem solver for Toronto and Vancouver is to create more supply, but we hear very little about this from politicians.
Is OFSI sacrificing Calgary, Saskatoon, Halifax and others to save Vancouver and Toronto?
This is a large and diverse country and OFSI’s moves plus all the interest rate hikes are going to hurt already soft real estate markets elsewhere. Calgary is still a soft market, although there are some signs of improvement. Days on Market is down to 45, a reduction of 2.26% from last year, but the average price is down 2.3% from last year.
Let’s go to a slightly healthier market: Halifax. Halifax single family home prices increased by more than 3 percent this year. However, it is taking an average of 73 days to sell a single family home. And remember that the TD report suggested that the OFSI rules could cut the demand for housing anywhere from five to ten percent.
In short, it is hard to manage a large country with diverse housing markets, and OFSI’s prescription will have adverse effects on softer markets such as Calgary and others.
OK, OK, OFSI. All Points approves
Vancouver is still ranked amongst global cities as being most at risk for a housing bubble. All Points Relocation Canada concludes that Vancouver’s and Toronto’s housing markets remain a risk to the overall Canadian economy, so OFSI’s new rules are the right move even knowing that there will be additional future interest rate hikes and although it will hurt softer real estate markets.