October 3, 2016. It’s the day that changed the mortgage broker industry for the foreseeable future – the day the Department of Finance introduced a new suite of mortgage rule changes aimed at safeguarding the economy and the housing market by “encouraging” insured borrowers to take on more serviceable debt.
The rule changes included a stress test that requires insured mortgage holders to qualify at the Bank of Canada posted rate. They also included a crackdown on lenders that bulk insure their portfolios.
The prevailing opinion among industry players was that the changes would make it harder and costlier for Canadians to qualify for mortgages. That opinion was echoed by the big banks as well – RBC forecast an 11.5% drop in resales in the 12 months following the announcement.
“In turn, we expect that weakening resale activity will erode sellers’ pricing power, yet, for the national and majority of provincial (and local) markets, we do not project prices to fall outright ... because we expect demand-supply conditions to remain balanced next year,” the bank said at the time. “Rather, our base case for 2017 shows benchmark prices continuing to rise at much slower rates.”
Now, nearly a year after the mortgage rules were put in place, statistics are starting to reveal how impactful they have been. The first indication came from Genworth
Canada. The nation’s second-largest provider of mortgage insurance reported that the total value of new insurance written in Q2 of this year was down 81% from a year ago. Portfolio insurance, meanwhile, fell 96% between Q2 2016 and Q2 2017, and Genworth saw a 14% decrease in insurance bought by homeowners.
CMHC confirmed that trend, announcing in late August that the country’s insured mortgage market had declined by about 33% year-over-year in the second quarter of 2017. In its latest financial report, CMHC revealed that it provided 78,607 units of mortgage loan insurance in the three-month period ending June 30, a sharp drop from the 117,463 units during the same period a year ago. CMHC told the Canadian Press that the decrease in volume was largely a result of the new rules the federal government introduced last year.
On the heels of those figures, one of the country’s largest real estate brokerages, Royal LePage, released a study on millennial sentiment around real estate. The results showed that millennials buyers believe last year’s mortgage rule changes have been a major roadblock preventing them from entering the housing market.
“One of the things that came out of the report was millennials’ impression that the government’s actions relating to ... mortgage insurance were an impediment,” said Phil Soper, president of Royal LePage.
According to Royal LePage’s report, 49% of millennials believe the federal government’s mortgage regulations have impacted affordability, forcing them to consider lower-priced homes. The study also found that while 69% of millennials hope to own a home in the next five years, only 57% of those surveyed believe that they will be able to afford one.
“In addition to high home values, peak millennials also face increasingly stringent mortgage stress test regulations, which push potential buyers to the sidelines, electing to either remain in the rental market to save up enough money for a down payment or move to more affordable regions,” the report said, adding that 64% of millennials believe homes in their area are unaffordable.
That number is significantly higher in hot markets like British Columbia (83%) and Ontario (72%). “Of those who do not believe they will be able to own a home in the next five years, 69% stated that they cannot afford a home in their region or the type of home they want, while roughly a quarter (24%) are unable to qualify for a mortgage,” the report said.
In late August, credit bureau TransUnion provided further proof of the mortgage rules’ impact. The agency reported a 10.4% decline in origination volumes in Q1 2017 compared to Q1 2016. That included a 12% drop in prime mortgages and a 5% decline for ‘super prime’ consumers.
“Recent new regulations in Ontario appear to have had an impact on the volume of home sales and, consequently, mortgage demand,” said Matt Fabian, director of research and industry analysis for Trans Union Canada. “So while the number of mortgages is increasing, it is doing so at a slower rate than last year.”
Finally, the latest proof of the mortgage rules’ impact came from none other than the finance minister himself.
“Preliminary data received since the government implemented its most recent adjustments to mortgage rules in October 2016, suggests that the rule changes are having their intended effect,” Bill Morneau said in a letter to the Finance Committee. “A decline in the share of new insured loans issued to highly indebted borrowers suggests the quality of credit is improving in the high-ratio mortgage market. This development helps to ensure that Canadians are taking on mortgages that they can afford.”
In the face of such evidence – both hard and anecdotal – the industry can only hope those in charge of macroprudential oversight will pump the brakes on any further cooling measures.