I honestly don’t think that people would be so worried, anxious, stressed, jittery, frazzled, concerned, tense, hassled, or any other synonym for stress, if the associated test itself had a different name.
If this was called the “Financial Lending Life Pattern Guideline,” instead of mortgage stress test, I really don’t think we’d be having the same conversations.
In any event, after a long week, I had planned to regale you with some Photos of the Week, but I knew one or two readers would say, “I expected more from you, David,” and I didn’t want to be reminded of the first time I was ever with a girl.
Sooooo……let’s have a brief conversation about this week’s OSFI changes, and tell you about the TRB Q&A I have planned for next week on the topic…
First order of business, folks: tell me why OFSI implemented this new stress-test.
a) An attempt by the government to reign in borrowing among Canadians.
b) An attempt to cool the housing market.
Geez, on that question alone, we could argue all day.
I’ve said it before, and I’ve said it again: the government has spent the better part of the last decade changing policy in attempts to cool the housing market.
I’ve also provided this list, or some version of it, many times before, but since the U.S. housing crisis in 2008, we’ve seen the following major changes to the Canadian mortgage market:
*Eliminating 107% financing and other products that require no down payment, and offer money back on closing
*Instituting a minimum 5% down payment rule (from 0%, or negative down payment, as above)
*Eliminating the 40-year amortization
*Eliminating the 35-year amortization
*Instituting a minimum 20% down payment rule for second properties, ie. investment, or non-primary residence
*Increasing the downpayment for purchases over $1,000,000 to 20%
*Ensuring all borrowers qualify at the 5-year, fixed-rate mortgage on a 25-year amortization (this was a precursor to stress-testing)
*Increasing CMHC insurance premiums
*Increasing the downpayment for the portion of purchase price from $500,000 – $999,999 from 5% to 7.5%
*Creating a “stress test” for insured mortgages, ie. those under $1,000,000.
All those changes, and nothing cooled the market.
What did cool the market?
The Ontario Fair Housing plan this past April, or, at least the timing of the plan did.
There are still those among us, myself included, who believe that the main reason that the market cooled after April was because of the unprecedented rise in home prices from January to April. The contents of the Ontario Fair Housing Plan didn’t really have an effect on the market, since only the point about the Foreign Buyer’s Tax had any real teeth, but the sight of politicians standing in front of podiums, talking about cooling the market, was ultimately what cooled the market.
So here we are, a half-year later, and we’re still talking about cooling the market.
Except this time around, the chatter about the Office of the Superintendent of Financial Institutions (OSFI) spearheading the “mortgage stress-test” has nothing to do with cooling the market, and everything to do with reducing debt-loads among Canadians, and somehow “strengthening” Canadian financial institutions.
So again, I ask, is this really the objective?
Because so many times in the past, the CMHC has instituted measures aimed at cooling the market, but announced as measures to “reduce debt” or some other rhetoric.
Before we go any further, perhaps I should outline the OSFI policy changes for those not in the know.
You can read the entire release HERE.
The title of the release reads:
OSFI is reinforcing a strong and prudent regulatory regime for residential mortgage underwriting
I love how carefully the wording is chosen.
It doesn’t say “creating” a strong and prudent regulatory regime, or “implementing.”
It says “reinforcing,” which is essentially implementing new policy, while patting yourself on the back for the old one.
There is no mention, anywhere, of “cooling the market,” nor will there be.
It would seem, at least this time around, that these changes really, truly, for perhaps the first time, are aimed at lending practices.
Here’s the bulk of the release:
The changes to Guideline B-20 reinforce OSFI’s expectation that federally regulated mortgage lenders remain vigilant in their mortgage underwriting practices. The final Guideline focuses on the minimum qualifying rate for uninsured mortgages, expectations around loan-to-value (LTV) frameworks and limits, and restrictions to transactions designed to circumvent those LTV limits.
OSFI is setting a new minimum qualifying rate, or “stress test,” for uninsured mortgages.
Guideline B-20 now requires the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate +2%.
OSFI is requiring lenders to enhance their loan-to-value (LTV) measurement and limits so they will be dynamic and responsive to risk.
Under the final Guideline, federally regulated financial institutions must establish and adhere to appropriate LTV ratio limits that are reflective of risk and are updated as housing markets and the economic environment evolve.
OSFI is placing restrictions on certain lending arrangements that are designed, or appear designed to circumvent LTV limits.
A federally regulated financial institution is prohibited from arranging with another lender a mortgage, or a combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum LTV ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law.
I know you didn’t read the second two points.
You saw the figure, +2%, and a bell went off, as if to say, “I have heard about this.”
Yes, it’s a stress-test, much like the one that was brought into effect two years ago, for insured mortgages.
That policy change had absolutely zero effect on the market, much like the previous policy changes.
I remember doing a spot on CTV the day those changes came out, and the question posed to me was not, “Will this stress-test have an effect on the market?” but rather, “How much of an effect will this new stress-test have?”
Everybody had already made their minds up.
This time around is no different.
Don’t get me wrong – this isn’t going to help the residential real estate market! But is it going to cause it to crash? I think you all know me too well for me to even answer that…
I know, I know – the bears are digging their claws deep into the linoleum tile of their rental apartment right now, predicting Armageddon.
But there’s one thing people need to remember about mortgage pre-approvals from before this new stress-test was announced: they were always for more than buyers wanted to spend.
One of the recurring themes over the last few years, specifically, I’d say, the past five, is that most of my buyers get pre-approved for more money than they want to spend.
My buyers will tell me in our first interaction, “We’re looking to purchase for about $1.1M, maybe a bit more if we find the perfect house.”
Then a week later when we meet at a property, and I ask them if their mortgage pre-approval was completed, they’ll say, “Yeah, it’s crazy – the bank approved us for $1.5M, which is just crazy! We don’t want to spend that! I don’t think we could afford that!”
Time and time again, I’ve heard this story.
So when I read the headlines in the newspapers, that “….buyers will be able to afford 20% less than they would have before the stress-testing,” I think to myself, “So what?”
If they were being approved for amounts they didn’t want to spend in the first place, then what’s a 20% reduction?
Well, that sounds like I’m putting a really positive spin on this, doesn’t it?
Fair point, even though I’m the one arguing it, on the readers’ behalf. But I can see just how biased that must sound – me trying to defend the almighty real estate market, in the face of great calamity.
I do think there’s going to be fallout from the stress-testing, and there are going to be buyers who wanted a $2.2 Million house, who were stretched to the absolute max, that can now only afford a $1.8 Million house. But those buyers are not the norm. In my experience, and I sell about 25 properties over $1M per year, maybe 1-2 of those buyers are stretching to the absolute max. That will have an impact, but not nearly what’s being reported in the media.
Ah yes, the media reports! They’re eating this up, aren’t they?
When I read, “…..affordability is down 20%,” I think it’s irresponsible.
There’s these insinuations in the newspapers that as a result, home prices will drop 20%. And you just know that’s how a lot of people want to read this.
But there’s no direct correlation between a reduction in the pre-approval amount of a would-be buyer over $1,000,000, and the decrease in average home price.
As I said, many buyers won’t be affected, as they won’t want to spend whatever the banks were pre-approving them for.
And how many of these buyers will now end up going to unregulated lenders? HERE is a great article on that subject, which deserves a read.
The Fraser Institute released a study last week suggesting that the mortgage stress-test is “unnecessary” and “harmful.” You can read that article HERE too.
But personally, I don’t think it’s bad policy.
Unnecessary, perhaps. But it’s not a bad thing.
I don’t believe interest rates are going to double any time soon, nor do I even think they’ll be up a full 100 basis points in the next 18-24 months. I just don’t see it happening.
But Canada has always been viewed as having one of, if not the best banking system in the world.
And if that’s the case, then I’m ready to simply go with the flow.
Just think about that for a moment. There are 195 countries in the world, and wee little Canada, of all places, is at the top of the banking hierarchy.
The World Economic Forum ranked Canada’s banking system the “World’s Soundest” for a staggering eight years in a row, from 2008 to 2015 inclusive. Alas, we were ranked third in 2016, and second in 2017.
Eight years in a row. That’s incredible. That’s like Lance Armstrong in the Tour de France! Wait…..well…ummm….
So you know what?
I’ll be the last one to complain about this policy change.
Perhaps it’s progressive. Perhaps it’s protective.
Either way, it’s not a bad thing.
So now let’s talk about the effect it’s going to have, notably where, who, how, and then of course – what are the unintended consequences? Yes! there are always unintended consequences!
Next week, I’m going to sit down with my mortgage broker, Joe Sammut, and answer any questions you guys may have about the new OSFI policies.
Feel free to write your questions in the comments section below, email me, Tweet me, or send it over Instagram with a photo of your $45 lunch from a place I would never go to.
If you have questions, let me get you answers from an expert.
I’ll film next week, and have it up for Wednesday.
Have a great weekend, everybody!