Easier Mortgage Rules Are No Fix for Canada’s Housing Crisis

(Bloomberg) -- Mortgage rule changes introduced by the finance department this week aren’t sufficient to address the affordability crisis faced by many Canadians, according to two of the nation’s largest banks.

The finance department unveiled a new benchmark interest rate on Tuesday as part of stress tests that determine whether people qualify for insured mortgages. This comes after criticism that the policy was too tight and unfairly kept younger, first-time buyers out the market.

The gap between the old qualifying rate and the new rate is about 30 basis points, which will allow the median household in Canada to buy C$13,500 ($9,800) in extra real estate, according to CIBC’s Benjamin Tal. That equates to less than a 3% improvement in purchasing power, the bank’s deputy chief economist wrote Friday in a note to clients.

“It’s becoming more and more apparent that, short of drastic measures, it’s impossible to fight supply issues with demand tools,” Tal said. “Increased supply (rental or otherwise) is the only reasonable solution to the housing affordability crisis that many Canadians are facing.”

While the existing qualification rule, introduced in 2016 for insured mortgages and extended in 2018 to the uninsured space, were effective in restoring balance to a market that seemed to be escalating out of control, a rebound in Canadian housing is underway. Home prices in some of the country’s largest cities such as Toronto climbed to fresh records recently, driven higher by dwindling inventories.

Tal’s comments were echoed by Neil McLaughlin, group head of personal and commercial banking at Royal Bank of Canada, who said Friday on a conference call with analysts the stress test change will have “quite a minimal impact.”

“Our analysis so far looks like it would be about 25 to 30 basis points reduction in the qualifying rate,” McLaughlin said. “That would really translate into a fairly small increase in purchasing power for the average borrower, probably in the neighborhood of about C$20,000, C$25,000 on an average mortgage.”

He also agrees with Tal on what’s needed to address the affordability issue. “The lack of supply in the major urban markets is still the real focus for where the policy needs to go,” he said.

To contact the reporters on this story: Chris Fournier in Ottawa at cfournier3@bloomberg.net;Doug Alexander in Toronto at dalexander3@bloomberg.net

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Divya Balji

©2020 Bloomberg L.P.