Canadian housing entering “severe correction”

By in Global Housing

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Via Bloomie:

Canada’s banking regulator released final rules that will make it tougher for borrowers to take on uninsured mortgages, adding to a growing list of measures to rein in the nation’s housing markets.

The Office of the Superintendent of Financial Institutions announced measures targeting borrowers in the uninsured segment of the mortgage market that has been responsible for the bulk of growth recently. A mortgage doesn’t need to be insured against default if the borrower makes a down payment of at least 20 percent.

The new measures for uninsured mortgages will force lenders to test borrowers’ ability to pay higher interest rate than the one they’ve actually been offered, to test their creditworthiness if borrowing costs increase. The move will probably have a damping effect on a market already hit by higher borrowing costs and a slew of similar measures over the past several years.

“Unlike past rule changes, this one comes in an environment of Bank of Canada tightening, and as Toronto’s detached market is already correcting in the wake of separate provincial policy measures,” Doug Porter and Robert Kavcic, Toronto-based economists at the Bank of Montreal, said in a note to investors. “These changes could prolong that adjustment.”

Mortgage “originations” may fall by as much as 15 percent on the OSFI measures, which may even reduce the amount of rate increases the Bank of Canada will need to make next year, The BMO economists estimated. “This significant move by the regulator acts as a de-facto tightening,” they said.

Some charts for ya, it has a long way to fall:

And what Garth Turner has to say:

The doubters on this miserable site and elsewhere in the world of ballsy real estate investors can give it up now. We have seen the end. It is called B-20.

The bank cop (OSFI) – as predicted – yesterday lowered the hammer on the residential market with new rules soon to take effect and virtually guaranteed to dry sales and lower prices. They’re also designed to protect the banks, drop mortgage risk and shield us from our own house lust.

The changes will restrict credit by ensuring most borrowers qualify for lower loans. Soon we’ll have a universal stress test, applicable to everyone regardless of how big a down payment they have in their jeans. The minimum rate is the Bank of Canada benchmark of 4.89% or the current rate plus 2%. No escape. Going short or variable won’t save you. Neither will having 50% to put down. And it doesn’t matter how much money the bank of Mom slipped you. If you fail the test you join Russian athletes.

This effect is stunning.

Six months ago pretty much any moister with a skateboard, a gig to McD’s and parental money could slide into a condo with a loan at 2%. Now the effective rate’s 5%. There has been no other year on record in which mortgage rates more than doubled in a few months. If you buy the theory that house prices got stupid because loan rates crumbled, then you know what’s likely to happen now.

The industry knows it. They hate it.

Mortgage Broker, RateSpy founder and industry spokseguy Rob McLister is unequivocal: “This is easily the most groundshaking mortgage rule of all time, and that’s not an understatement,” he says. Paul Taylor, the mortgage industry boss chimes in: “I am disappointed with the decision to implement a new stress test at whichever is greater of 200 basis points above the contract rate or the benchmark rate. The new qualifying rate will have negative implications for the Canadian mortgage finance market and the national economy as a whole.”

Ontario Real Estate Association head, and ex-politico Tim Hudak is ticked: “OSFI’s new stress test for uninsured mortgages is overkill. These changes will hurt middle class families and punish careful savers the most, forcing them to take on more debt and higher interest payments.”

So how bad is it? Are these guys just moaning because their fees and commissions will piddle away? Or is this a market-killer? Too much, coming on top of the foreign dudes tax, the empty house tax, the CRA crackdown on speckers, the universal rent controls and the assault on Air BnB?

It appears to be a game-changer. With 20% down a family that qualified to buy a $726,000 house last week will swing a deal for only a $570,000 place after the test arrives. That’s 21% less purchasing power. It’s what happens when sub-3% mortgages turn into 5% ones. Given the laws of supply and demand, house prices are on the road to a 21% drop over time – and that would be from GTA prices which are already 20% below last April’s delusional level.

So what to do?

First don’t listen to anybody in the mortgage business tweeting this advice: “If you’re in the mood to buy something, GET PRE-QUALIFIED TODAY as these changes happen January 1st (or before).” Sadly, a lot of inexperienced moisters and ill-informed newbies will do exactly that. The slaughter of the innocents. Guts and juices everywhere.

Seriously. If the OSFI Plus-2 Stress Test is going to choke credit and turn a $725,000 house into one worth $570,000 later, why would you rush out to qualify so you can pay $155,000 too much? Just wait, have less debt, pay it off faster and laugh at your cousin who bought in April of 2017 and tried to shame you.

Second, be real careful about the 905 and the Lower Mainland (including Victoria). House lust slopping over from 416 and urban YVR drove prices in the hinterland to the moon in a totally unsustainable fashion, and big declines lie ahead. After all, the burbs are not the city. There will always be less demand, more new housing stock and all the crap hassles of commuting.

Third, if you’re unhappy with your mortgage lender and want to switch, do it now (if possible). You won’t be stress-tested upon renewal if you stick with your bank, but if you switch you must qualify at the brutal level. If the value of your home has declined in the meantime, you could be offside there, too, since a new appraisal will be needed.

Does this mean your existing institution can offer a less competitive rate and [email protected] will snicker a little into her wicket every time you pass by? Duh. Of course. Short hairs. They got you by them.

Finally, can you get around this stressful new situation by going to a house-horny credit union like Meridian or Vancity where OSFI rules don’t apply? For a while, maybe. But the CUs are not capitalized the way banks are and have a finite pool of real estate money to hand out. More likely is that Ontario and BC will do the prudent thing, and harmonize regs. That’ll ensure omnivorous lenders there don’t create huge new credit union risk the provinces must backstop.

In short, could be epic. Hope you got ready. Peak house is so gone.

Just as well Australia is different.

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