While the OSFI’s decision to tighten insured mortgage lending qualifications by stress-testing applicants at the 5-year posted mortgage rate (rather than the contract rate) appears to be necessary to cool down outsized price growth, Dr. Sherry Cooper of the Dominion Lending Centres
observed that the overall risks to the national financial system remain manageable.
“With so much attention paid to the imprudent borrower, I think it is important to note that the vast majority of Canadians manage their finances in a responsible manner,” Cooper wrote in her latest analysis posted on the DLC
’s online portal.
“For example, roughly 40% of homeowners are mortgage-free and one-third of all households are totally debt-free. Another 25% of households have less than $25,000 in debt, so 58% of Canadian households are nearly debt free. Hence, mortgage delinquency rates are extremely low,” Cooper explained.
“In addition, two-thirds of outstanding mortgages are fixed rate, which mitigates the risk of rising mortgage rates over the near term.”
Read more: Mortgage borrowers at risk of ‘payment shock’ after BOC’s rate hikes
This is despite housing no longer being the strongest driver of growth in the national economy.
“It has been widely expected that home sales would jump before yearend in advance of the new ruling and indeed they have. Even so, activity remains well below peak levels earlier this year and prices continue to fall in the Greater Toronto Area (GTA) for the sixth consecutive month. Indeed, national home sales were down 8.6% year-over-year in October, led by a whopping 18.4% plunge in Ontario,” Cooper stated.
“National sales momentum is positive heading toward year-end,” according to CREA chief economist Gregory Klump. “It remains to be seen whether that momentum can continue once the recently announced stress test takes effect beginning on New Year’s day. The stress test is designed to curtail growth in mortgage debt. If it works as intended, Canadian economic growth may slow by more than currently expected.”
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