The financial institutions' regulator is tightening rules amid BoC warnings of an overheating housing market
Clients who are planning to buy a home with an uninsured mortgage will face tighter restrictions on securing a mortgage from next month.
The Office of the Superintendent of Financial Institutions (OFSI) has announced that the qualifying rate for uninsured mortgages will increase to the greater of the mortgage contract rate plus 2%, or 5.25%.
Canada’s housing market has surged in the past year with sales and prices driven by increased demand – often due to people spending so much time at home in lockdowns – while low supply continues to tighten markets.
OFSI says that, while not all the elements of the housing market risk are within its remit, it is concerned about high indebtedness, rapidly rising home prices, housing supply, and competitive bidding.
“In a complicated and sometimes volatile housing market, the need for sound mortgage underwriting cannot be underestimated,” commented Ben Gully, assistant superintendent, regulation. “The rate in place as of June 1, 2021 will help support financial resilience should economic circumstances change, while our commitment to review the qualifying rate at least annually will contribute to continued confidence in the Canadian financial system.”
OSFI says it will review and communicate the qualifying rate at a minimum annually, every December, well in advance of the high-volume housing spring season.
The Bank of Canada warned Thursday that the hot housing market is a risk to financial stability because of speculative behaviour by some buyers.
It said that there are signs that people are buying houses in some areas with the expectation of rising prices and this creates an unsustainable dynamic.
Governor Tiff Macklem said that large mortgages may make households vulnerable to a change in circumstances such as unemployment. If house prices were to fall, a cut in consumer spending as households struggle with mortgage payments would slow the economy and may add stress to the financial system.
The BoC says that the rise in mortgage debt has more than offset declines in areas such as credit card debt.
Dash for cash
Outside of the housing market, the governor warned of the ongoing potential for demand for liquidity in the bond market.
He said that this is growing faster than banks can supply in times of high stress and the financial system could be vulnerable to a sudden spike in demand for cash.
This “dash for cash” was seen during the early months of the pandemic.
Governor Macklem also noted the mispricing of assets that are exposed to climate risk. This could mean investors and financial institutions facing losses from severe weather events or the transition to a low-carbon economy.