Rainstorm of New Mortgage Rules: A Cold Shower for the Québec Real Estate Market

The Québec Federation of Real Estate Boards Revises 2017 Forecasts Downward

L'ÎLE-DES-SŒURS, QC, Oct. 28, 2016 /CNW Telbec/ - The Québec Federation of Real Estate Boards (QFREB) has just published an economic analysis in which it outlines the overall impact of the new measures announced by the federal government on the Québec housing and mortgage markets. To better understand what are the new measures, please refer to Box 1.

For the QFREB, there is no doubt as to the consequences of these tightening measures: there will be a definite short- to mid-term slowdown of the real estate market. As a result, the Federation has significantly revised downward its forecasts for 2017. "The impact on the number of sales will be, at a minimum, as great as the 2012 tightening of the mortgage rules which reduced the maximum amortization period from 30 to 25 years. In terms of property values, there is a real risk that prices will decline. Since a home is the principal asset for most households, a decline in the sense of prosperity and confidence could, in turn, negatively affect consumer spending," explained Paul Cardinal, Manager of the QFREB's Market Analysis Department.

A Successful Soft Landing for Québec

Although these tightening measures, combined with those announced by the Office of the Superintendent of Financial Institutions, are designed to be preventative and aim to protect the financial security of Canadians, support the long-term stability of the housing market and improve the integrity and equity of the tax system, it must be kept in mind that they will come into force almost simultaneously. In Québec and other provinces, the effects will be compounded in a context where the growth of property prices is already anemic.

To justify the need for the new measures, the federal government cites its concern about "rapidly rising house prices in some of our biggest cities, particularly in markets like Toronto and Vancouver." Yet, about 75 per cent of the Canadian population lives outside these two metropolitan areas in markets that show no signs of overheating. As shown in the table, Average House Prices, since the beginning of 2016, prices are in decline in Saskatchewan and the Maritimes, stagnant in Alberta, and growing at less than 3 per cent in Manitoba and Québec. 

The Mortgage Rate Stress Test for High Loan-to-Value Mortgages Will Penalize Many First-Time Buyers 

Since October 17, 2016, all high loan-to-value mortgages (i.e. when the homebuyer makes a down payment of less than 20 per cent of the purchase price) must pass a "mortgage rate stress test". For borrowers to qualify, this test requires that the gross debt service ratio (GDS) be calculated using the five-year benchmark rate which is about two percentage points higher than the contractual rate.

This measure strongly penalizes first-time buyers. It will have the effect of significantly reducing the number of households that can qualify for an insured mortgage as well as the amount that can be borrowed.

New Loan Insurance Restrictions for Low Loan-to-Value Ratio Mortgages Will Reduce Mortgage Market Competitiveness 

Other measures, which come into force on November 30, concern low loan-to-value ratio mortgages (i.e. when the homebuyer makes a 20 per cent or more down payment of the purchase price). Insurance in the form of portfolio insurance (i.e. mortgages are grouped or pooled together and then securitized¹) is often used by insurers for such loans.

However, the new rules will be tougher with respect to eligible loans and will significantly restrict the use of securitization by non-bank lenders, depriving them of vital source of funding that enables them to compete with large banks. These changes will consequently reduce the availability of funding and competitiveness in the mortgage market, and likely result in higher mortgage rates.

Risk Sharing Between Lenders and Mortgage Insurers: Increased Mortgage Rates

On October 21, the federal government also launched a consultation process on risk sharing between lenders and insurers for government-backed insured mortgages. The proposed measure would require mortgage lenders to bear a portion of the losses on insured mortgages that default, whereas currently, the risk is assumed by insurers who are directly responsible for 100 per cent of losses and indirectly by taxpayers through the guarantee provided by the Government of Canada. The goal is to reduce the exposure of Canadian taxpayers to the inherent risks of the mortgage market.  

"While we believe that this is an excellent initiative, it must be understood that no matter the form that this risk sharing will take, it will necessarily increase mortgage rates since lenders will be required to actively manage the loss risk. A preliminary analysis conducted by the federal government suggests that the average increase in lender costs could be between 20 and 30 basis points," added Mr. Cardinal.

Overall Impact: Significant Slowdown of the Québec Real Estate Market

In summary, the main projected impacts of this rainstorm of new measures from Ottawa are: the disqualification of many potential first-time buyers, reduction in permissible loan amounts, cutback of available funds in the mortgage market, and an increase in mortgage rates².

The impact of these changes will be major which is why the QFREB has significantly revised downward its 2017 forecasts.

About the Québec Federation of Real Estate Boards 

The Québec Federation of Real Estate Boards (QFREB) is a non-profit organization representing the province's 12 real estate boards and their nearly 13,000 member real estate brokers. Its mission is to support Québec's real estate boards in order to defend, protect and promote the interests of real estate brokers through the provision of services in the areas of professional practices, public affairs and market analysis. The QFREB is guided by an approach that is centred on collaboration and resource sharing.

For more information, please consult the latest edition of the newsletter, Window on the Market.

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¹ Securitization is the process of transforming blocks of eligible mortgages into mortgage-backed securities.
² Rates available to borrowers and not posted rates.

SOURCE Québec Federation of Real Estate Boards

Jacynthe Alain, Assistant Manager - Communications and Public Relations, Québec Federation of Real Estate Boards, 514 647-8249, [email protected]