Cool It. The Feds Aren’t Killing The Housing Market

Allow me to riff on the housing market and how recent changes to mortgage rules will affect Canadian homebuyers. To recap, the feds stepped in and introduced a mortgage rate stress test for fixed term mortgages of five years or more. The stress test, which already existed for variable and 1-4 year fixed terms, stated that prospective homebuyers need to qualify at the Bank of Canada posted 5-year rate (current 4.64 percent).

The announcement got the housing and mortgage industry (re: homebuilders, real estate agents, mortgage brokers and lenders) out of sorts, saying that Ottawa is effectively ‘nuking’ the mortgage market by imposing sweeping changes to a problem that only really exists in Vancouver and Toronto.

Are the feds killing the housing market?

Are the feds killing the housing market?

The industry is upset with the feds for introducing the new rules without consultation. Sure, I get it. But don’t throw out nonsense arguments like this one from a local homebuilder in Lethbridge, Alberta:

“The federal government is placing unnecessary restrictions around Canadians fundamental right to own a home.”

Oh really? Or, how about this one from the comparison site RateSpy:

“(Prior to October 17), someone with 10% down who makes $50,000 a year can qualify for a $300,000 home purchase. That hypothetical maximum mortgage amount will plunge 18% to $246,000, once this rule takes effect.

This one regulation alone could shut out more buyers from the market than possibly any of the prior rule changes, including the reduction in the maximum amortization from 30 to 25 years (announced in 2012).”

But maybe, just maybe the feds got this one right:

I’ve been there. One of my biggest financial regrets is getting in over my head as a first time homebuyer. I needed a roommate just to afford the mortgage payments, and when my roommate moved out, my finances began to spiral out of control.

That was 13 years ago. Affordability is much worse today. Read what these millennials had to say about the housing market:

“If one of us loses our job during a recession, how will we pay the mortgage on the house we just bought – which cleaned out our savings? Can we have another child while we’re still in low-physical-risk years, without putting ourselves at high fiscal risk?”

“When I first bought my condo, we borrowed six times my annual income to buy it and the mortgage payments were crippling.”

It’s not just about borrowing six times your income to buy a house. It’s about the short-term, buy at all costs mentality of homeownership that is rampant throughout the country.

What happens when one spouse loses their job or goes on paternity leave? What happens to your savings when all of your income goes towards mortgage and car payments? That’s why a stress test is so important.

Final thoughts

CMHC will issue its first ‘red’ warning for Canada’s housing market this week, sounding the alarm over high levels of indebtedness and elevated house prices in an assessment of 15 metropolitan markets.

That’s why the feds took measures to cool the housing market. Not to deny first-time homebuyers their “right” to own a home, but to tap the brakes on a market that has had its foot on the gas for the last decade, fuelled by record low interest rates and creative lending practices.

Decreasing the maximum amount you can borrow from six times income to five won’t kill the housing market, but it might lead to more sensible lending (and sane borrowing) from a country that has gone mad for housing.

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  1. Rob on October 24, 2016 at 7:13 am

    Hey Robb, That quote on RateSpy was accurate: “This one regulation alone could shut out more buyers from the market than possibly any of the prior rule changes”

    No other single rule change has ever tightened lender debt ratio guidelines like this one. Far from nonsense my friend.

    • Echo on October 24, 2016 at 7:49 am

      Hi Rob, thanks for stopping by. The nonsense comment was more directed at the local homebuilder who feels that the feds are meddling in our God-given right to own a home.

      The Rate Spy statement I found hyperbolic in the context of ‘nuking’ the mortgage market. Is that really your belief? We now have more sensible lending guidelines for 5-year fixed rate mortgages, but these measures already existed for variable and shorter term periods. Doesn’t it make sense to bring the 5-year fixed terms in-line as well?

      • Rob on October 24, 2016 at 2:38 pm

        Hey Robb,

        No question, some housing markets needed to be slowed. The debate merely centres on what the feds actually chose to do.

        It’s great that they applied the Bank of Canada qualifying rate to all high-ratio insured borrowers. But it was overkill to do it with well-qualified conventional borrowers who have 20%+ equity and who now won’t have as many refinance options.

        Moreover, from as best as we can tell:

        • Up to 15-20% of buyers will no longer qualify for the home they need/want for at least 2-4 years. Removing these buyers will impact prices in some locales far more than others.
        • Remote, rural, economically challenged and economically undiversified regions will lose vital housing market liquidity.
        • Bank challengers (mortgage finance companies) will lose much of their ability to cost-effectively compete with the Big 6. These firms are largely responsible for improving discounts from posted rates since 1990, and keeping billions of dollars in Canadians’ pockets. Note that the extra demand caused by this rate competition pales in comparison to falling market interest rates, immigration, organic population growth, supply contraints, income and employment gains, urbanization, etc.)
        • Up to 20% of folks renewing their mortgages will be trapped with their existing lender (due to the new posted qualifying rate test) and have to accept that lender’s much higher renewal rates
        • Up to a quarter of those refinancing will be declined or see their loan amounts drastically reduced, forcing them to stay indebted much longer in high-interest unsecured credit.
        • Mortgage discounts will fall significantly for everyone, even extremely well qualified families who present virtually zero risk to the system. This is due to the new combined measures of much higher capital requirements, loss-sharing, removal of insurance on some transactions and securitization restrictions.

        All things considered, if these new federal measures aren’t a nuclear solution to largely a regional problem, they’re at least a massive ordnance conventional bomb.


        • Don on October 24, 2016 at 3:30 pm

          Further to your comments:

          Not to go too far down the path of conspiracy theory but when you start also adding in the current proposed changes to CMHC what banks will be facing is some increased risk with respect to partial liability on insured mortgage loses, partially mitigated by less risk with respect to some reduction of overextended mortgage borrowing as well as reduced competition from not bank lenders. Less competition, higher prices (interest/fees).

          Thanks to our government trying to save people from themselves, people may find that the cost of their house is less but the interest cost increases. In high cost items like housing interest costs are an incredible lever but time will tell what the point of inflection is.

          People need homes, the taxpayer needs protection from CHMC losses, and the big banks as one of the keystones of the Canadian economy need profits. With the current plans it is not clear who the winners and losers are going to be.

  2. MrsK on October 24, 2016 at 1:20 pm

    Excellent! Well said!
    It is unfortunate that we need the government to intervene and stop individuals from being idiots and getting in over their heads and the lenders who talk them into it.

  3. Big Cajun Man (AW) on October 24, 2016 at 3:48 pm

    Being a Libertarian , I believe the Government has no place in our bedrooms or wallets, however, in this case when the Government has to enforce “common sense” rules, I suppose it needs to be done.

    • Samantha on October 25, 2016 at 7:30 am

      I share the same view as yours, however I think the Feds don’t really care if the average citizen is getting too deep in debt. They care about the banking system though, wich has been allowed to make risk-free loans through CMHC, which is the real reason for this huge housing bubble.

      The Feds move now is a lousy try to artificially increase mortgage rates only, and allow Bank of Canada to lower its rate again, without further incresing the size of the bubble. While this may seem like a noble intention, it is simply a case of “have your cake and eat it too” by the Feds, which we all know never works.

  4. Rick on October 24, 2016 at 8:14 pm

    I don’t see anything common sense about these rules at all.

    All I see is the Liberal government taking mortgage choices away from everyone and raising borrowing costs. They keep talking about housing imbalances. High prices and high debt loads in two cities don’t mean a family with an 800 credit score, little debt and government job in Saskatoon are going to default on their mortgage. Stop regulating the entire country based on what certain idiots are doing in Vancouver and Toronto.

  5. Gary on October 25, 2016 at 7:11 am

    Robb: I agree with you 100%!

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