During the past 15 years, mortgage policies from the federal government have made it increasingly difficult for potential home buyers to obtain the mortgages they need. These policy changes have included tougher lending criteria from the Office of the Superintendent of Financial Institutions, as well as higher costs and more conditions for mortgage insurance that is provided by federal agency Canada Mortgage and Housing Corp.
The earliest policy tightening (the 2008 elimination of zero-downpayment mortgages and 40-year amortization periods) was a good move. But, subsequent changes have become increasingly inhibitive.
The changes have varied in their severity. Some of the changes had negligible effects. The most impactful were the elimination of 30-year amortization periods for insured mortgages (July, 2012) and the OSFI mortgage stress test (end of 2017). Now, interest rates have increased sharply, and potential mortgage borrowers face rates around six per cent and have to demonstrate that they can afford payments at rates around eight per cent. Home sales have slowed sharply.
There are many factors that affect home buying, including movements of interest rates, growth of the population, and job creation. The complexity of the housing market makes it difficult to determine the effects of the mortgage policies.
I have found it useful to compare trends in the resale markets of Canada and the United States. Admittedly, there are differences between the countries’ housing markets, especially in terms of mortgage rules and regulations. But, the main economic drivers of our housing markets behave in quite similar ways. The housing data tells me that from July, 2012, to the present, total resale activity in Canada has been about 10 per cent lower than it should have been. This is a total reduction of about 650,000 resales during that period.
A lot of commentary says the new policies have reduced housing demand, but that isn’t an accurate statement. They have reduced transactions in the housing market, not the demand. Housing demand is the requirement for new housing that arises from our growing population. With an increased rate of population growth, housing demand has increased.
By impeding transactions, the mortgage policies have made it more difficult for that demand to be satisfied in the housing market.
The policies have caused demand to move around within the housing market. For example, people who believe that they are good candidates to buy are unable to, and therefore they have to stay in the rental sector longer than they would like. This has resulted in lower vacancies and accelerated rent increases. This has made investment-buying more attractive: During the recent past, investors have increasingly displaced home buyers.
In another adjustment to mortgage policies, more buyers have gone to “alternative” mortgage lenders (which operate outside of federal regulations). Those borrowers are now exposed to higher interest rates. Plus, in the alternative lending space, there are risks to the borrowers that they wouldn’t face in the “prime” space (notably, difficulty when it comes time to renew the mortgage).
The mortgage policies have actually created new risks within the mortgage market and within the broader economy.
In short, the changing mortgage policies have not reduced the pressures in the housing market; they have just altered the ways in which those pressures get expressed.
In response to pressures in housing markets, federal mortgage policies have escalated during the past decade and a half. This looks a lot like the arcade game Whac-A-Mole. I’m comfortable to conclude that the mortgage variant of the game has been unproductive, and has harmed Canadians, by preventing them from making legitimate housing choices that are in their best interests.
In addition to discouraging resale market purchases, the mortgage policy changes have made it more difficult to buy new homes. Most of those purchases occur prior to the start of construction. Therefore, the policies have impaired new housing construction. If the factor from the resale sector (a 10-per-cent reduction) also applies to new construction, then the policies have reduced housing starts by more than 200,000 dwellings during the past decade.
And now, the Bank of Canada interest rate policies are another factor that is going to impair housing production, which will further worsen the housing crisis.
Another round of Whac-A-Mole is playing out, as OSFI is making it more difficult for lenders and borrowers to deal with payment difficulties by extending amortization periods. Which is a greater risk to the financial system: temporary extensions of amortization periods or causing mortgage foreclosures that don’t need to happen?
There are multiple factors that have created the current housing crisis. The federal government is focusing its attention on what other levels of government could do. It has taken some useful steps, including waiving the harmonized sales tax on new rentals, and creating financial incentives for municipalities to approve more new housing. But it should also discuss the role of its mortgage policies, especially the highly onerous mortgage stress tests, and the too-expensive cost of Canada Mortgage and Housing Corp.’s mortgage insurance.
Will Dunning is a consulting economist, based in Toronto. He specializes in housing market analysis.
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