The Canadian government should consider being flexible on its new mortgage lending rules because the impact has been longer-lasting and more significant than originally intended, Toronto-Dominion Bank says.
Home sales were about 40,000 lower between the final quarter of 2017 and the same period a year later than they otherwise would have been without the rules, according to a note to clients Tuesday by TD economists Rishi Sondhi, Ksenia Bushmeneva and Derek Burleton. That translates into about a 7 per cent decline in sales, they said.
Immediately removing the rules would increase Canadian home prices an additional 6 percent, on top of Toronto-Dominion’s current forecast for a 4 percent increase, by the end of 2020, the economists wrote, adding that would boost home prices by about C$32,000 ($24,000) on average.
There is also evidence of a shift in business to private lenders who are not subject to the rules, known as B-20 and implemented by Canada’s banking regulator. The economists estimate the share of borrowers in Toronto accessing funds from alternative lenders increased to 8.7 per cent in the second quarter 2018, from 5.9 per cent in the same quarter a year earlier.
Toronto-Dominion also forecasts:
- Housing starts to trend lower through 2020, as B-20 crimps market for new housing
- New housing construction will be a drag on growth next year, though healthy job gains and robust population growth will provide a floor
- Currently bank sees Canadian home prices stabilizing by mid-year and rising 4 percent by end of 2020
- However, if B-20 was immediately removed, nationwide sales and prices could be about 8 percent and 6 percent higher by end of 2020, equating to about C$32,000 difference in avg Canadian home price, with disproportionate impacts in Toronto, Vancouver
- Removal of B-20 would represent a “significant near-term boost to housing activity, though at a longer-term cost of worsened affordability”
Recent rule changes by Canadian policy makers, including tightened mortgage lending, appear to be bringing the country’s real estate market more into balance.
CMHC lowered its assessment of the overall vulnerabilities in the national market to “moderate,” from “high,” according to a report Thursday from Ottawa.
Home sales and prices have slowed in Canada after governments at various levels took steps to mitigate the risks of a crash. The federal banking regulator imposed stress tests on new mortgage lending last year, a measure that has been particularly controversial. Toronto-Dominion Bank and Canadian Imperial Bank of Commerce, along with realtor groups and home builders, have argued the rules should be eased, saying they are punishing first-time buyers.
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