To rent or to buy can is a convoluted question that many people ask themselves when looking at homes. In today’s pricey housing market with tight mortgage rules, it’s becoming increasingly difficult for Canadians to buy homes. With Canada’s elections right around the corner, many banks are anticipating a change in these mortgage rule.
Home sales were about 40,000 lower between the final quarter of 2017 and the same period a year later than they otherwise would have been without the rules, according to a note to clients Tuesday by TD economists Rishi Sondhi, Ksenia Bushmeneva and Derek Burleton. That translates into about a 7% decline in sales, they said.
There is also evidence of a shift in business to private lenders who are not subject to the rules, known as B-20 and implemented by Canada’s banking regulator. The economists estimate the share of borrowers in Toronto accessing funds from alternative lenders increased to 8.7% in the second quarter 2018, from 5.9% in the same quarter a year earlier.
The changes mean federally regulated lenders must now run a 200 basis-point stress test on new mortgages, to ensure the quality of lending remains high amid escalating home prices. The measures are disproportionately affecting first-time home-buyers, who normally account for between 40% and 50% of the market, as well as cities that have more youthful demographics like Toronto and Vancouver, TD said.
“Right now it’s a one-size-fits all type of policy, and borrowers differ in their ability to service their mortgage, and they’re different in terms of their risks,” TD economist Ksenia Bushmeneva. She said policy makers could consider being flexible around the 200 basis point stress test limit, given it’s “somewhat arbitrary,” and doesn’t take into account the credit-worthiness of borrowers or their life stage.
Immediately removing the rules would increase Canadian home prices an additional 6%, on top of Toronto-Dominion’s current forecast for a 4% increase, by the end of 2020, the economists wrote, adding that would boost home prices by about $32,000 (US$24,000) on average.
The rules have pushed potential buyers into the rental market, leading vacancy rates for purpose-built rental units to fall by as much as 30 basis points in Toronto and Vancouver. That poses a “significant challenge” as those markets are already “severely under-supplied,” with current vacancy rates at just 1%, the economists wrote.
Toronto-Dominion joins fellow-lender Canadian Imperial Bank of Commerce, along with realtors and builder groups in calls for the government to revisit its B-20 rules.
According to the note, Toronto-Dominion also forecasts:
Housing starts to trend lower through 2020, as B-20 crimps market for new housing.
New housing construction will be a drag on growth next year, though healthy job gains and robust population growth will provide a floor.
Currently bank sees Canadian home prices stabilizing by mid-year and rising 4% by end of 2020. However, if B-20 was immediately removed, nationwide sales and prices could be about 8% and 6% higher by end of 2020, equating to about $32,000 difference in average Canadian home price, with disproportionate impacts in Toronto, Vancouver.
Removal of B-20 would represent a “significant near-term boost to housing activity, though at a longer-term cost of worsened affordability.” The Canadian government should consider being flexible on its new mortgage lending rules because the impact has been longer-lasting and more significant than originally intended.