Intended and unintended effects of B-20 have only intensified

Intended and unintended effects of B-20 have only intensified

Intended and unintended effects of B-20 have only intensified

With the tighter B-20 mortgage qualification rules having dominated the market environment since their introduction early last year, both the intended and unintended consequences of the stress tests have only intensified, according to industry observers.

In a new piece for the Financial Post, Ryerson University associate professor Murtaza Haider and real estate industry veteran Stephen Moranis wrote that home sales in the country’s traditionally hottest markets of Toronto and Vancouver have significantly cooled down.

Latest data revealed that the Greater Toronto Area saw its sales activity fall by 2.4% year-over-year in February, while Vancouver suffered an even more dramatic 33% sales decline during the same time frame.

But while this might indicate that the regulatory changes have succeeded in moderating speculation-induced activity and price growth, Haider and Moranis pointed out that the Office of the Superintendent of Financial Institutions Canada never actually specified that B-20 is meant to deal with rising housing prices nationwide.

Read more: Gov’t should incentivize, and not penalize, home buyers

Quoting OSFI assistant superintendent Carolyn Rogers, the duo wrote that B-20 was primarily designed to improve mortgage underwriting standards, and the market cooling was largely an unintended side-effect.

“In her words, the test was intended to provide a safety buffer so that borrowers do not ‘stretch their borrowing capacity to its maximum,” the analysts said. “As such, the stress test has been successful in lowering the prevalence of high-risk lending…and the quality of credit has improved while the quantity of credit being offered has declined significantly.”

Haider and Moranis stated that the OSFI should not be faulted for ensuring a “margin of safety” during a period of record-low interest rates and elevated household debt levels. However, market conditions have also significantly shifted since the introduction of B-20, which should compel the regulator to adjust the rules as needed.

“If OSFI independently finds that the market conditions have changed sufficiently in the past 14 months, a review of the margin of safety might be a good thing.”

3 Comments
  • Victor Simone 2019-03-11 10:32:45 AM
    When OSFI decided that they had to make a change and institute the B20 ? Immediately, someone should have put a clown nose on that person suggesting the idea and punched them on the button.

    B20 blows.
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  • JSydneyH 2019-03-17 2:31:32 PM
    The fundamental driver for B20 was the anticipation that interest rates would rise rapidly. I believed then and still believe that fear is unfounded. I doubt central banks interest rates will get over 3% in the next five years, which will keep mortgage rates at or near today's levels.

    Rules need to be based on reality not sn expectation.

    Time to review and update before we enter a more significant downturn.
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  • 2019-03-17 2:44:03 PM
    Yeah the stress test has been great. Rents have gone up causing people to have higher debt ratios then they would if they had a mortgage payment which in most areas mortgage payments are way lower then rent payments . People have to pay the rent and aren't paying other credit because they can't afford it with high rental prices causing credit scores to drop and causing delinquencies to go up .
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