Canada’s finance department recently relaxed mortgage requirements in an attempt to boost the real estate market. Now, as prices are soaring in some of the country’s largest cities, experts are questioning whether the new rules will alleviate the overheated markets.
Canada’s finance department recently announced new mortgage rules that will go into effect on April 6. The relaxed rules are intended to help first-time homebuyers – who previously couldn’t afford a home – to enter the market.
The stress test was first introduced in 2016 for insured mortgages; it was later extended in 2018 to the uninsured space with the purpose of reducing household debt. The rules required homebuyers to qualify at a higher interest rate than the one contracted. However, the stress test was criticized for being too tight because many first-time homebuyers were no longer able to qualify for a mortgage and purchase a home.
Purchasing Power to Increase by 3%
Despite the new changes aiming to balance the market and encourage first-time homebuyers, experts are skeptical of whether they will have a significant influence. CIBC’s deputy chief economist, Benjamin Tal, said the difference between the old qualifying rate and the new one was around 30 basis points. As such, the median household in Canada will be able to buy $13,500 in extra real estate. This equates to a slight 3% improvement in purchasing power.
Quoted by Financial Post, Tal said it was not effective to try to solve the supply issues by fueling the demand tools, other than when drastic measures were required. He believes that increased supply – whether it’s a rental or otherwise – is the only reasonable solution to help alleviate the housing crisis in Canada.
Neil McLaughlin, group head of personal and commercial banking at Royal Bank of Canada, agreed with Tal’s perspective:
“Our analysis so far looks like it would be about 25 to 30 basis points reduction in the qualifying rate. That would really translate into a fairly small increase in purchasing power for the average borrower, probably in the neighbourhood of about $20,000, $25,000 on an average mortgage. The lack of supply in the major urban markets is still the real focus for where the policy needs to go.”
Home Prices Expected to Rise
While some experts believe the relaxed mortgage rules will have only a minor influence, others predict a rise in prices after the rules go into effect. While the qualifying rules were effective in calming an overheated housing market, a potential rebound may be imminent. In fact, due to falling inventories, home prices are rising in the Toronto market and other large cities in Canada.
For instance, Robert Kavcic, senior economist at BMO Capital Market, believes prices and unit demand will be affected and he expects the changes to start rolling as the spring selling season begins. If previously, buyers had to aim for cheaper houses to qualify, this spring will see the opposite.
Stephen Brown, senior Canada economist at Capital Economics, said these changes will put more pressure on housing prices in the coming year. He said for BNN Bloomberg:
“The proposed change to the mortgage stress tests could put even more upward pressure on house prices over the next 12 months by increasing the amount that buyers can borrow by more than [three percent]. With the Bank of Canada already concerned about the impact that the recent loosening of financial conditions is having on the housing market, this is another reason to believe that it will leave its policy rate unchanged.”
While the older mortgage rules were once effective in bringing balance to the market, it remains to be seen whether the new changes will succeed in aiding first-time homebuyers – and for how long until they need to be readjusted.