Report warns against tightening mortgage rules

Thursday, June 30, 2016

In a report released June 28, Will Dunning, Mortgage Professionals Canada’s chief economist, warned against further tightening mortgage lending conditions in Canada, saying it would significantly reduce housing activity. According to Dunning, housing activity is a primary driver of the Canadian economy and any adjustments to mortgage lending that removes people from the market could have serious adverse effects.

The past few years have seen Canadians waiting for the housing bubble to burst, but Dunning says that there is insufficient proof that a bubble even exists. He supports this by saying statistical research shows that increases in home prices has very little influence on market activity, and low interest rates have created “affordability space” in which Canadian home prices could increase. Instead of supporting the claim of housing market bubbles, this shows that housing markets in Canada incorporate fundamental economic conditions, as well as other local conditions.

“Economic fundamentals can change,” said Dunning in a press release. “One of those fundamentals is availability of finance. There is a risk that changes in policies of lenders or mortgage insurers that reduce access to mortgages could cause an unnecessary drop in housing demand and housing prices, and bring consequent economic damage.”

Following widespread calls for further tightening of mortgage lending conditions in Canada to address what may be called excessive risk, Dunning says that there is no evidence of an increase in risk by borrowers or lenders. Policy changes made by mortgage insurers or lenders cause a larger risk to the housing market and would make it harder to finance home purchases.

“Now that the energy sector is no longer a major economic driver, a healthy housing sector is even more essential,” adds Dunning. “It would be tragic to unnecessarily impair this key economic force. Such errors have the potential to cause a sharp downward adjustment of prices.”

Economic confidence is what most influences purchase decisions of future homeowners, according to The Next Generation of Homebuyers, a survey by Mortgage Professionals Canada. Most of those surveyed feel that Canadian real estate is a good long-term investment and 72 per cent say a mortgage qualifies as good debt, as long as Canada is on strong economic footing.

The report also states that job growth has been a large driver of housing activity, but record-low interest rates make this an unusual time as interest rates have a greater influence. Canada is currently experiencing a market that favours sellers, where there is strong demand for housing and a flat supply. The report also finds that over the past five years, the average resale price of a home in Canada has increased by 6.4 per cent per year on average, according to the Canadian Real Estate Association.

When housing affordability is calculated using the actual interest rates that can be found in the market, conditions are excellent across Canada, even in the case of higher home prices, which increases demand. An increase in interest rates that lasts for more than a few months could cause mortgage costs to grow to unaffordable levels, limiting housing activity. The recent strength of housing indicators is largely caused by Vancouver and Toronto and their surrounding areas. Anecdotal evidence finds that in Vancouver, foreign investor activity is distorting the housing market; a trend that may also be happening in Toronto.

To access Dunning’s full report, Looking for Balance in the Canadian Housing and Mortgage Markets, please click here, and to see a copy of The Next Generation of Homebuyers, please click here.

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