The housing market remains the biggest threat to Canada’s economic health. That is according to a report by the International Monetary Fund (IMF), published this week after an official visit to Canada.
They are responding to calls by several real estate boards in Canada to ease the new B-20 stress-test guidelines that were brought into effect in January 2018.
The new rules raise the bar for a borrower’s mortgage affordability. Now borrowers have to prove they could afford their mortgage even if rates were two percentage points higher than their contract rate or the Bank of Canada posted five year fixed rate, whichever is higher. This has had a cooling effect on the two hottest real estate markets in Canada, Toronto and Vancouver. Both cities real estate boards have said the rules are “hurting” Canada’s economy.
The Toronto Real Estate Board (TREB) says B-20 needs to be “revisited.” They say it’s discouraging otherwise qualified buyers to get into the market.
But the IMF disagrees. In its mission concluding statement after their official visit to Canada, the IMF strongly urges Canada to keep the B-20 rules intact. “The government is under pressure to ease macro prudential policy or introduce new initiatives that buttress housing activity. This would be ill-advised, as household debt remains high and a gradual slowdown in the housing market is desirable to reduce vulnerabilities,” says the report.
Are you about to enter the property market? Compare the best mortgage rates on RateSupermarket.ca today.
The Bank of Canada also has shown its support for the new B-20 rules. Bank of Canada Governor Stephen Poloz recently said in a media interview that he would “frown upon” policymakers loosening certain housing rules. He says the rules are doing their job of making sure Canadian mortgage holders can afford their loans for the long term.
The CEO of TREB John DiMichele has been protesting against the B-20 rules. In a statement earlier this year, “One area that needs to be revisited is the imposition of the OSFI-mandated two percentage point mortgage stress test….While we saw buyers return to the market in the second half of 2018, we have to have an honest discussion on whether or not today’s homebuyers are being stress tested against rates that are realistic.
He adds, “Home sales in the GTA, and Canada more broadly, play a huge role in economic growth, job creation and government revenues each year. Looking through this lens, policymakers need to be aware of unintended consequences the stress test could have on the housing market and broader economy.”
Canada mortgage growth hit a 17 year low in the first quarter of 2019. This has sent shockwaves through the real estate and mortgage communities, who have been enjoying double digit growth year over year for almost a decade.
The IMF says Canada is still at risk of a “sharp” housing correction, “A key domestic risk is a sharp correction in the housing market. If a house price correction is accompanied by a rise in unemployment and a collapse in private consumption, additional risks to financial stability and growth could emerge.”
Regardless of what the IMF, real estate boards or the Bank of Canada say, Canadian home buyers need to calculate their affordability, based on their realistic ability to pay down debt. That can mean calculating their rate as if it’s even more than two percentage points higher their contract rate, to make sure they can afford to stay in their home even if rates rise sharply.