Canadians looking for new mortgages are finding the landscape very confusing as both changes in government policy and commercial bank competition work in somewhat opposition directions. The interactions of these two developments have slowed mortgage lending, threatening to reduce home sales further, especially in the large metropolitan regions.
First, let’s look at the role of government in altering the landscape. The Federal government introduced new mortgage lending rules, effective January 1, 2018, that upped the requirements to qualify for a mortgage loan. Now borrowers have to prove that they would be able to cope with interest rates substantially higher than their contract rate— the so-called “stress “test. Mortgage Professionals Canada, an industry group, estimates that more than 100,000 homebuyers, who would have qualified in the past, would likely fail the stress test and would have to either reduce the size of their loan request or abandon their application entirely. Many of these potential buyers will turn to the unregulated mortgage market, comprising mostly of private lending institutions or lightly regulated financial institutions who are not subject to these stringent rules.
The Federal government and its regulatory arm, the Office of the Superintendent of Financial Institutions, denies that they have had a role in influencing the new higher rates, arguing that the marketplace determines borrowing rates. However, it is hard not to come away with the view that the government is not displeased with the higher borrowing rates. For some time, Federal authorities have voiced concern about this current cycle of rising house prices and have tried to talk down prices without any success. Now, they are using their regulatory powers to influence market behavior.
As a consequence, mortgage growth is slowing. The Canadian Real Estate Association reports that national home sales volume sank to the lowest level in more than five years in April, falling by 14 per cent from the same month last year. The national average sale price decreased by 11 per cent year-over-year. The chartered Canadian banks, who account for over 75% of mortgage lending, are experiencing a very pronounced slowdown in mortgage growth; loan growth was a meagre 0.2 percent growth since the start of the year.
