Earlier this year, the Office of the Superintendent of Financial Institutions (OSFI) announced its launch of public consultations on three new mortgage underwriting regulations intended to go beyond the existing minimum qualifying rate—otherwise known as the mortgage stress test—which would further restrict access to mortgage financing.
OSFI’s intention behind this proposal is to impose even more restrictive access to mortgage financing in an effort to help mitigate risk for federally-regulated financial institutions against potential consumer default.
OSFI’s proposed changes
These proposed regulations, which include loan-to-income and debt service restrictions, plus an even stricter interest rate affordability stress test, have the potential to cause more harm than good in the current economic environment.
It is clear that homeowner indebtedness is already moving in the right direction, considering that in 2022, unit sales declined and home prices fell, with consumers responding to higher borrowing rates.
“For OSFI to place new hurdles in the path of young Canadians’ pursuit of home ownership now…would be turning a blind eye to the macro-economic environment, and unnecessarily cruel.”
The mortgage stress test has proven to be an effective tool to ensure Canadians can meet their obligations to a lender in the event that interest rates increase, as they have this past year.
The legislation was introduced in 2018 when borrowing costs were very low, and rates were highly likely to rise. For OSFI to place new hurdles in the path of young Canadians’ pursuit of home ownership now, in an environment where rates are high and likely to fall, would be turning a blind eye to the macro-economic environment and unnecessarily cruel.
Further, such a move could do more harm than good, forcing families into the unregulated B-lender market. Despite a year of rapidly-rising interest rates, we see that the number of Canadian homeowners who have failed to meet obligations to their financial institutions remains exceptionally low.
“…The stress test hurdle should be lowered, not raised.”
Earlier in April, the central bank chose to hold the overnight lending rate for the second consecutive month, signalling that rates are stabilizing and could start to go down later this year or in early 2024. At a time when we do not expect the cost of borrowing to rise dramatically in the short or medium term, the stress test hurdle should be lowered, not raised.
There is minimal evidence that supports the need for additional regulations when it comes to the lending process. Given major banks already have tight restrictions which are designed to protect Canadian consumers from default or foreclosure, putting further measures in place will not make a material difference to Canada’s already low default rate.
“Implementing stricter regulations poses the risk of pushing more homebuyers into the unregulated B-lender market.”
It will, however, affect young Canadians, especially those who are attempting to buy their first home. Asking our largest banks to serve fewer people in this demographic seems counterintuitive at this moment.
Access to financing is critically important, and as much as possible, loans should be provided by regulated financial institutions. Implementing stricter regulations poses the risk of pushing more homebuyers into the unregulated B-lender market.
The real estate sector is one of Canada’s largest industries. Already reeling from the record pace of interest rate hikes, an aggressive push to restrict Canadians’ ability to secure a mortgage could trigger a broader depression of the housing market and force the economy into a recession.
Phil Soper is President & CEO of Royal LePage and Bridgemarq Real Estate Services. With over 21,000 agents in its Royal LePage, Royal LePage Commercial, Johnston & Daniel, Via Capitale and Proprio Direct businesses, it is the largest real estate brokerage firm in Canada. In the 2023 comprehensive ranking of industry leadership in North America, the Swanepoel Power 200, Soper was again, for the tenth consecutive year, named the most influential leader in Canadian real estate and 10th worldwide.
Wake up Orea and Crea and do your jobs. Notwithstanding recent industry consultations OFSI knows exacty what their implementation plans are
Historically low default rate means nothing to OFSI. Any lowering of the GDS/TDS ratios will drop home prices immediately.
Your analysis Bang On Mr. Soper , the Stress test was brought in to protect the Major Banks from a sudden and relatively major increase in interest rates which at the time seemed to be inevitable and which subsequently happened . The problem is that we should not lose sight of the fact that as a Lender you must accept a certain level of risk . We now have a situation that the worst case Scenario has already happened and we are basically back to a similar place interest rate wise where we were before interest rates declined to record lows . If you have borrowers that can qualify at the current rates it means that they are confident that the potential for a significant increase in interest rates at the end of their Mortgage is unlikely and or that if it happens they will be able to deal with it . This was exactly the way things were in normal times in the days before there was a stress test . If the borrower is prepared to accept the risk then why shouldn’t the Bank also accept the risk . I don’t think there should even be a stress test anymore . The Canadian Banks are big Boys that can look after themselves . Currently they are not making as much money as they used to and part of the reason may well be because they are not making as many Mortgage Loans as they used to .
More stringent rules to roadblock First time and young people from getting into the market. Loosen some of this OVER governing and rates will come down .
It’s no wonder young people are disillusioned.
Agree with this Jim! Young people are very disillusioned with alot in this country. Homes unaffordable, cost of food, utilites etc etc.
Back in the 80’s us young ppl had no problem purchasing a home and the wages weren’t that much lower!
Now the banks have socked the young ppl who could afford a home two-three years ago with double the interest rate!!! How aggravating, what is going on??
Sick and tired of government agencies doing what’s best for the government and the banks. They should be doing what’s best for the citizens, which is to create an environment with less barriers to entry for home ownership. Incentivize builders with credits to build more homes and credits for land developers. I would rather see some private enterprises who spend in the economy get rich with government tax credits, than banks. Protecting banks and creating more rules to tighten borrowing is just stupid. Many in this younger generation have been royally screwed out of home ownership opportunities in this country. What a shame!
What makes you think the B market is unregulated? It too is regulated by OSFI B-20 rules. It is the C, D….. market that has less regulations.
Your analysis Bang On Mr. Soper , the Stress test was brought in to protect the Major Banks from a sudden and relatively major increase in interest rates which at the time seemed to be inevitable and which subsequently happened . The problem is that we should not lose sight of the fact that as a Lender you must accept a certain level of risk . We now have a situation that the worst case Scenario has already happened and we are basically back to a similar place interest rate wise where we were before interest rates declined to record lows . If you have borrowers that can qualify at the current rates it means that they are confident that the potential for a significant increase in interest rates at the end of their Mortgage is unlikely and or that if it happens they will be able to deal with it . This was exactly the way things were in normal times in the days before there was a stress test . If the borrower is prepared to accept the risk then why shouldn’t the Bank also accept the risk . I don’t think there should even be a stress test anymore . The Canadian Banks are big Boys that can look after themselves . Currently they are not making as much money as they used to and part of the reason may well be because they are not making as many Mortgage Loans as they used to .
The Feds should be more in tune with really helping young Canadians. Do not keep bringing more people into Canada and spending billions on this act. Charity begins at home. Money should be diverted to young home ownership. Don’t make it harder. Young people all around are getting depressed and feeling hopeless. And these are well educated youth. Definity do not put further restictions on home ownership. Enough is enough. The government quickly gives themselves their entitlements but turns their back on the youth. Remember home ownership is the only way 3/4 of the Canadian population can save for their retirement. This should be encouraged right from when a young man or woman is out of school or university.
I agree these young Canadians are feeling hopeless. The government has to do something to help young people.
The stress test should never have been. It stopped thousands from buying in 2018, if just by a hair, then prices double so those folks will probably never own. They would have possibly higher rates at the end of their term which if they could not handle, they could have sold putting hundreds of thousands in their pocket had they been able to buy in 2018. Dumb idea from the start, just creates a bottle neck of demand. The Bank of England came to their senses a few months ago and scrapped their stress test. BoC Govenor blew it and should resign.
The author does not explain what the old stress test was, and specifically what the proposed new stress test will be, other than to say they are loan-to-income and debt service restrictions, plus an even stricter interest rate affordability stress test. How do they differ?
It’s hard to understand his point if he doesn’t explain the difference between the existing and proposed regulations.
Ironically, the system should be favorable to those in need. I find the young first time buyer is scraping the last penny to put together a down payment, has to go thru a very high stress test to be qualified and if he manages to put together 20% of down payment can not get the best rate because is not CMHC insured. This is a a terrible injustice. The rules are harder for those that are in greater needs and the institutions hit them in the worse possible manner. The government is trying to destroy the Industry or to defeat those who want to better in life. Sad, very sad. This regulations are bad for the consumers and for the Real Estate hard working agent that makes a living with this profession.
The rich can buy those million dollar houses cash with no problem but the young generation that depends on a job, can’t do it.
CREA, do your job. Help the young consumers or those in real need of having a home. Help to create programs that work for the common person. Thank you.
Ironically, the system should be favorable to those in need. I find the young first time buyer is scraping the last penny to put together a down payment, has to go thru a very high stress test to be qualified and if he manages to put together 20% of down payment can not get the best rate because is not CMHC insured. This is a a terrible injustice. Sad, very sad. This regulations are bad for the consumers and for the Real Estate hard working agent that makes a living with this profession.
The rich can buy those million dollar houses cash with no problem but the young generation that depends on a job, can’t do it.
CREA, do your job. Help the young consumers or those in real need of having a home. Help to create programs that work for the common person. Thank you.
It seems only fair to me if they’re implementing more stringent requirements and reducing the risk of borrower defaults to protect lenders, then maybe they should also reduce the CMHC and others mortgage insurance premiums for borrowers as well.
Here’s a thought……what if a buyer qualified on the stress test – and paid their mortgage with that payment. The difference between the stress rate and real rate could be applied directly to the principal over the term, which would greatly reduce the principal upon renewal. Mortgagee would not be spending quite as much on non-housing things.
Ditto to everyone above….Sick and tired of government agencies doing what’s best for the government and the banks. They should be doing what’s best for the citizens, which is to create an environment with less barriers to entry for home ownership. I would rather see some private enterprises who spend in the economy get rich with government tax credits, than banks. Protecting banks and creating more rules to tighten borrowing is just stupid. Many in this younger generation have been royally screwed out of home ownership opportunities in this country. What a shame!