BUSINESS
12/16/2018 09:39 EST | Updated 12/16/2018 09:56 EST

Canada's New Mortgage Rules Are 'Overkill,' Industry Insiders Say, But Getting Rid Of Them Would Be Worse

A country that is already a top candidate for a financial crisis shouldn't be making it easier to borrow.

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The new rules have worked. So let's get rid of the new rules.

That, in essence, is the argument coming from a growing number of real estate industry insiders who are calling on federal regulators to repeal the mortgage "stress test" partly credited with cooling Canada's housing market this year.

The stress test "had a very targeted outcome," said Brad Carr, CEO of Toronto-based Mattamy Homes, in an interview with Bloomberg. "It's been achieved so it's kind of overkill now."

By that he means that the days of runaway price growth are over. Sales have slowed, and evidence suggests many speculators have exited the market. Bidding wars have cooled off, and many former "seller's markets" are now in balanced territory.

Watch: This basement bachelor in Toronto is gobsmacking. Story continues below.

But in the view of the industry, the stress test has also had some serious unintended consequences. For one, they argue it's shutting many young people out of homeownership.

The stress test, in effect, reduces the maximum amount of mortgage you can borrow by roughly 20 per cent. This has the largest impact on younger, first-time buyers who are most likely to take on mortgage amounts close to their limit.

The industry has been so worried about the disappearance of younger buyers from the market that the Ontario Real Estate Association has described governments' various new housing policies as "a war on first-time homebuyers."

There is evidence that the new mortgage rules hit the wrong places. Though they were targeted at the overheated markets in Toronto and Vancouver, they ended up taking a bite out of some of the country's weaker housing markets, making things worse in places such as Atlantic Canada.

Earlier on HuffPost Canada:


In Calgary, where home affordability is at normal levels, detached home sales fell to their lowest level since the 1990s this fall, and the average selling price is down 2.9 per cent in a year. Meanwhile, in Toronto, where affordability is at its worst in nearly 30 years, home prices are 3.5 per cent higher than a year ago.

Some economists worry that the mortgage stress test, combined with rising interest rates, will push the housing market into an all-out downturn. Given that Canada has grown increasingly reliant on real estate for its economic growth, a housing correction today could have a larger impact on the country than previous downturns.

"These federally-mandated stress test policies are ... unnecessarily and ridiculously dangerous to the economy," economist Will Dunning, who occasionally writes reports for Mortgage Professionals Canada, declared in a client note earlier this year.

The industry's concerns are real, but there's only one problem. The one thing that could be more "ridiculously dangerous" to Canada's economy than the new mortgage rules would be the lack of them.

HuffPost Canada

For the past several years, the Bank for International Settlements (BIS) — a sort of "central bank of central banks" — has named Canada one of the top three or four likeliest candidates for a debt crisis.

In the view of the BIS, a key predictor of a debt crisis is borrowing levels that are above their usual, historic norms, and as we all know, Canada's debt levels are well above norms.

But since the new rules have come into place, consumer debt growth has slowed dramatically, down to its slowest pace in 35 years. If this keeps up, Canada will soon be falling from the "most likely to have a debt crisis" rankings.

The Bank of Canada has been particularly worried in recent years about "highly indebted borrowers," that group of mostly young homebuyers who have debt worth more than 4.5 times their income.

These borrowers are the most likely to default on their debts when some sort of economic shock happens, such as rising mortgage rates or the loss of a job.

HuffPost Canada

During the house price run-up of 2015 and 2016, there was a rapid expansion of these highly indebted households. But in the wake of the new rules, the Bank of Canada is reporting a significant decrease in new mortgage borrowers taking out these huge sums.

Simply put, far fewer borrowers are being allowed to take on risky levels of debt. And while that may slow the housing market, it means many households will be spared financial disaster down the road.

Repealing the stress test would mean that homebuyers would suddenly be able to "afford" a lot more house than they could before. That alone could start a new buying frenzy, sending prices upwards again and causing household debt ratios to start growing again, and once again increasing the risk of a financial crisis.

Failing upwards

In the 12 months between April 2016 and April 2017, the average house price in Toronto jumped by more than 30 per cent. There were no economic reasons for this. It was simply FOMO, the fear of missing out — the belief that if you don't buy today, you will have to pay more tomorrow. That belief alone can take markets to irrational heights.

What happened to house prices in Canada's hottest markets was, in a very real sense, a market failure. Driven by panic, the market "failed upwards."

For that reason, the real value of the new mortgage rules may be psychological. Just the realization that there is something holding real estate back may be enough for homebuyers to keep cool heads.

And that, more than anything, is what we need in our housing markets.