LACKIE: Tightening lending rules now likely to create unintended consequences – Toronto Sun

At this time last year, I recall great discussion about the mortgage stress test.

Mostly complaints were about how much harder it was making things for would-be buyers, particularly the first-time buyers increasingly priced out of the red-hot housing market.
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The overarching belief seemed to be that the rates people were having to qualify at were so unlikely in terms of probability that the measure was essentially a meaningless hurdle serving to block young people out of realizing their homeownership dreams.

Those difficulties in qualifying seem insignificant now that the affordability crunch has gone (at least partially) from theoretical to inescapably, sublimely, painfully real. The worst case scenario being prepared for — as in, interest rates substantially rising from those record-lows — is now upon us.

Ironically, of all the things (mostly) keeping the wheels on the proverbial bus during this rocky time in real estate, it seems that the stress test is doing its job and may well be what saves us from an 2008-level crash.

Though it’s actually a little bit more complicated than that since it was that very same stress test that functionally nudged people into the easier-to-qualify-for variable rate mortgages that are now bringing the most acute pain.

Some people are holding on by the skin of their teeth.

Yet still, when it was announced last week that the Office of the Superintendent of Financial Institutions was “launching consultations” on tightening mortgage lending rules in their mission to safeguard the big banks, the resounding chorus was mostly of a “why now?” variety.

Especially because last year when the market was running hot, it was rumoured that they would step in to curb the rampant use of home equity lines of credit to fund deposits for secondary properties. In spite of the fact that 100% financed properties were clearly a landmine waiting to explode, OSFI did nothing.

And now the real damage is already done and market demand has largely dropped off. I am no longer fielding multiple calls a week from clients wondering if they should try dabbling in investment properties.

The rates themselves are what has extinguished the fire. Additional measures may just be the fire hose sprayed over the ashes.

But rather than dismissing it as being performative and inconsequential, here’s why OSFI tightening their guidelines could functionally bring about more harm: Canadians coming up on renewal in this high-rate environment may now have no choice but to accept whatever terms their current lender will offer them. Any attempt to shop around for better rates or extend their amortization will require qualifying all over again.

One mortgage advisor I spoke with said that “new buyers are already going to struggle but this will make it harder for people already drowning to keep themselves afloat.”

Another agent I spoke with, Andrew Dreyer from Outline Financial, put it more gently:

“A more secure banking sector with lower exposure to risk is a good thing, however, many are concerned with OSFI’s timing. Many Canadians are already in a position where their indebtedness has increased, rates have increased, and there is a looming recession. Making it more difficult to access low cost capital at this moment may have unintended consequences; pushing people to higher cost solutions, which could end up creating a different set of problems in the long run.”

It will be interesting to see what changes will ultimately come to pass on the other side of this consultation process. But it seems like this may be yet another measure to fall into the day-late-and-a-dollar-short category.

@brynnlackie

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