“[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,” housing critic and financial advisor Hilliard MacBeth wrote in a recent analysis, as quoted by HiBusiness
The sudden introduction of the rules should give Canadian consumers cause to be extremely vigilant, the analyst warned, especially since housing now contributes significantly to the national GDP.
“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,” MacBeth explained.
“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.”
MacBeth added that the stricter stress test—which would measure consumers’ ability to pay at the major banks’ 5-year posted rate of 4.64 per cent—will impact hundreds of thousands of buyers. 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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Canadian home owners and hopeful buyers alike should be wary of the new federal mortgage rules that took effect last month, especially with the increased risk of lower economic output as a direct effect of the regulatory changes.