Mortgage stress rules determine the 2019 Real estate market outlook
TORONTO, Feb. 09, 2019 (GLOBE NEWSWIRE) — Real Estate Analyst and Vice President of PPS Realty Brokerage, Ali Salarian, believes that mortgage rules may have the most significant influence on the Canadian real estate market direction in 2019.
The most prominent real estate market in Canada recorded a 3.4% negative growth as released by the Toronto Real Estate Board (TREB) last month. This negative growth resulted mainly from tighter mortgage stress rules implemented by Office of the Superintendent of Financial Institutions (OSFI) twice: first in late-2016 and second in mid-2017. These rules were implemented in an attempt to improve the real estate purchase affordability and reduce the overall Canadian debts.
Many economists and industry experts believe both targets have been achieved. The 200 basis points above the contract rate were suggested to stress test the mortgage debt service, as the interest rate was increased many times by Bank of Canada (BoC) from 0.50 to 1.75, almost 125 basis points to catch up with economic growth and higher inflation during the last two years.
However, with less expectation to increase the interest rate in the next two years by the same basis points of earlier increase, the remaining of 200 basis points stress rule might be harmful to the economy. This might be so as we witness a rapid decrease in properties values, especially those above one million mark, which puts the banks collateral at a higher risk of diminution, beside weaker performance by mortgages sales last year, which might further hit banks’ profitability. A slower real estate market might benefit buyers, but in case of strict mortgages rules, the benefit might not be sufficient.
A recent move by major banks in the market was noticed to convince OSFI to ease the stress test rule. In my opinion, the stress test mechanism has to be flexible and has to reduce to 100 Basis points over contract rate according to the economic data, in order to achieve a positive growth by the end of 2019.