Mortgage rule changes are cooling housing market

Theglobeandmail.com
Aug. 22, 2017
By Bill Curry

Finance Minister Bill Morneau says last October's sweeping mortgage rule changes aimed at cooling Canada's housing market have successfully dampened high-risk borrowing.

But despite a report urging Ottawa to look at ways of boosting support for Canadians entering the housing market, the Minister ruled out any new measures along those lines, expressing concern that such an approach would encourage higher house prices.

The comments are part of a recent letter from Mr. Morneau to the House of Commons finance committee, which had released a wide-ranging report on housing in April.

The federal government announced four policy changes last October in response to concern over rapidly rising home prices, particularly in Vancouver and Toronto.

The changes included a new stress test for all new insured mortgages to ensure that home buyers would still qualify for a loan even if interest rates were slightly higher. Another change restricted access to mortgage insurance to homes with a purchase price of less than $1-million. The government announced new reporting rules for the primary-residence capital-gains exemption and also launched a consultation on having private lenders take on some of the risk associated with insured mortgages. Currently, the federal government is responsible for 100 per cent of an insured mortgage in the event of a default.

"Preliminary data received since the government implemented its most recent adjustments to mortgage rules in October, 2016, suggests that the rule changes are having their intended effect," states Mr. Morneau's letter to the finance committee.

"A decline in the share of new insured loans issued to highly-indebted borrowers suggests that the quality of credit is improving in the high-ratio mortgage market. This development helps to ensure that Canadians are taking on mortgages that they can afford."

Canadian existing-home sales were down 2.1 per cent in July, representing a fourth consecutive month of decline.

A TransUnion report released this week found the average size of a new mortgage in Vancouver was $517,415 in the first quarter of this year, down from $553,719 a year earlier.

BMO senior economist Robert Kavcic said tightening measures taken over the past year by the B.C. and Ontario governments, as well as local moves in Vancouver and Toronto, appear to have had more of an impact on cooling the market than the federal changes.

Mr. Kavcic said the government intervention at all levels was "absolutely necessary" given the unsustainable price hikes that had taken place.

"It's tough in that we have to endure a bit of a [housing market] correction now," he said. "But I think the adjustment that we are seeing now is far more favourable to what we would have seen a few years down the road if it was allowed to run."

The finance committee's April report said Ottawa should "examine increased support for first-time home buyers," but it did not make a specific policy recommendation. The report highlighted testimony from the Canadian Mortgage Brokers Association that called on Ottawa to allow 30-year amortization periods for first-time buyers with insured mortgages, in contrast to the current maximum of 25 years.

As recently as 2011, some insured mortgage amortizations were as high as 35 years until Ottawa cracked down by lowering the maximum to 30 years. Ottawa acted again in 2012 to restrict them to 25 years.

Mr. Morneau, Ontario Finance Minister Charles Sousa and Toronto Mayor John Tory had said in April that they would not be introducing any new measures that would boost demand for housing.

Mr. Morneau expanded on that view in his letter to the committee.

"Additional government support for home ownership, especially in the context of housing markets experiencing rapid price growth and restricted housing supply, are likely to be counterproductive," Mr. Morneau wrote. "Policies to further boost home ownership by stimulating demand would exert more pressure on house prices, with little or no positive impact on housing affordability."