New federal mortgage stress-test regulations could increase the cost of rental housing.
In reaction to the worrying levels of rising household debt in Canada, finance minister Bill Morneau has cooked up a way to slow the debt buffet. As of October 16, buyers are evaluated on their ability to pay their mortgage based on the Bank of Canada’s benchmark rate of 4.64 percent rather than the significantly lower posted rates offered by banks.
Under the new rules, those with lower incomes may or may not be approved for anywhere from 20 to 30 percent less in terms of house value than they would have been before the change. These potential buyers may look to the rental market instead.
Greater Victoria already has a notoriously low vacancy rate, reaching 0.6 percent last October; look no further than Nexus’ own cover story in early October to see the struggles that students face in this market. Add more demand for rentals, and we may be in for even pricier digs, and higher competition, in the third most expensive rental market in Canada.
These changes come alongside a proposal to have banks share risk for Canada Mortgage and Housing Corporation (CMHC)-insured mortgages. The federal government backs 100 percent of CMHC-insured loans: it’s a requirement when buyers have less than 20 percent as a down payment.
This premium, paid by borrowers, protects the lender against default. Banks having less risk—which is currently passed on to taxpayers—helps keeps costs of lending down. That could change. With more risk, lenders are expected to compensate by raising rates.
While I was writing this piece, TD announced an increase of 15 basis points to its variable mortgage prime rate, making it the first time the bank has differed this rate from their base prime rate. We may see competitors follow suit.
Remember when I said that banks tend to follow changes to the Bank of Canada rate policy? Well, this is a rare example of a time when they stray. It appears that between our central bank, governments, and commercial banks, the threat of a deepening housing crisis has everyone playing whack-a-mole.