In a contribution for Maclean’s
, author and financial advisor Hilliard MacBeth noted that the abrupt introduction of the regulatory changes should give Canadian consumers cause to be extremely vigilant.
“[The] adjustments to the rules could engender an orderly transition to a more balanced system and soft landing for house prices. But, while hoping for the best, Canadians would be wise to prepare for something worse than the oft-touted transition to stability,” MacBeth wrote.
“A painful unwinding of elevated leverage in the Canadian financial system is the most likely outcome, based on observation of similar adjustments in the U.S., Ireland and Spain.”
Complicating matters is that residential real estate now ranks along with the energy and manufacturing as major contributors to the national GDP, and the sudden changes could impair this vital component of the national economy.
“Any serious attempt to change the rules around insured mortgages could roil share prices of publicly-listed Canadian lenders as well as disrupt financing for housing. The availability of mortgage credit could dry up and conditions would be much more difficult for many buyers.”
The analyst added that the new requirement to test insured mortgages against the major banks’ 5-year posted rate of 4.64 per cent will impact hundreds of thousands of consumers. Prior to the announcement, the qualifying rate went as low as 2.17 per cent.
“For a household with $100,000 in total income the stress test could mean a 20 percent drop in approved mortgage value,” MacBeth warned. “The Bank of Canada estimated that more than 20 percent of all insured mortgages were contracted by households that have loan-to-income ratios of more than 450 percent.”
“Home buyers in Vancouver, Toronto, Victoria, Calgary and Edmonton are at the head of this class of risky borrowers. The slowdown in new money from this second source of buying power will have a large impact, especially on new home builders in those centres.”
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One of Canada’s fiercest housing critics has warned that the recently announced changes to federal mortgage rules will directly affect the main drivers of growth and activity in the country’s real estate sector.