Canada Eyes Further Rules to Curb Mortgage Growth

Canadian authorities on Thursday proposed further measures to tighten mortgage-financing, the latest sign of concern over pockets of overheating in the country's housing market.

The move comes even as activity in frothy markets in Toronto and Vancouver is slowing down and the Bank of Canada is setting the stage for imminent rate rises, possibly as early as next week.

Canada's Office of the Superintendent of Financial Institutions said it is eyeing rule changes governing mortgage issuance by banks. Most notable is a provision that would require all prospective buyers -- even those with a down payment of over 20% -- to undergo a so-called stress test before a bank can issue a loan. Under the stress test, prospective buyers would have to qualify for a mortgage at a rate roughly 200 basis points above what's negotiated.

According to housing-market analysts, the fresh set of measures could eliminate a number of prospective home buyers from the market and curb borrowing -- which is increasing at an annual rate of roughly 6%, or well above wage gains. The bulk of the borrowing is for mortgages and drawdowns on home-equity lines of credit.

"This is about reducing the rate of credit growth," said Will Dunning, chief economist for Mortgage Professionals Canada, a lobby group representing mortgage brokers.

The superintendent's office is giving stakeholders until Aug. 17 to comment on the proposed changes. In a letter explaining the proposed moves, the banking agency said persistently low interest rates, record levels of household debt and rapid increases in house prices in Vancouver and Toronto "could generate significant loan losses if economic conditions deteriorate."

The proposed changes come after Canada's Finance Minister Bill Morneau last fall introduced stress tests for buyers with a down payment of between 5% and 19%.

Currently, those making a down payment 20% or higher are exempt from any stress test, and are not required to obtain mortgage insurance under Canada's housing-market regime. Mortgage insurance in Canada is backed by the federal government, and protects banks from the risk of default. Mortgages for homes sold at 1 million Canadian dollars ($770,000) or more are not eligible for the insurance.

What Canada's banking watchdog is proposing "would take a massive sledgehammer to the mortgage market, because we are so thirsty for debt and for housing, and it's the topic of everyone's choice at the dog park, " said Jake Abramowicz, a Toronto-based agent at Mortgage Edge, an independent mortgage broker.

He said the tougher stress test means prospective buyers might not be able to borrow as much from the bank, and hence limiting the pool of houses they can put bids on. He added the move could represent a big shift in Toronto, where he conducts much of his business, because most clients he deals with already have a 20% or more down payment.

The proposed mortgage guidelines come as housing data for the Toronto market indicates a second-straight month of cooling sales in Canada's biggest city. Home sales in the Toronto area dropped 37.3% in June from the same month a year ago, while prices rose 6.3% to C$797,915, according to the local real estate board on Thursday.

In April, Ontario has introduced more than a dozen measures aimed at cooling soaring home-price gains in the Toronto-area market, including a surtax on foreign buyers, after the cost of owning a home in the city rose at 30% on a one-year basis for several months.

In Vancouver, whose housing market was fueled for years by foreign buyers, home sales dropped 11.5% in June from last year, while the average home price remained strong, moving up 7.9% to C$998,700.

The Bank of Canada warned last month that elevated house-price gains in Toronto exacerbated vulnerabilities posed to financial stability by record household debt and a hot real-estate market.

In recent commentary, Canada's central bank has set the stage for interest rate increases, the first in seven years, with a possibility of a jump this coming Wednesday, July 12. The central bank hasn't explicitly cited rising household debt and frothy real estate as a reason to raise rates, although economists say an increase would provide an effective backstop to a number of non-rate tools officials have introduced since the last decade to tamp down housing exuberance.

Write to Paul Vieira at and David George-Cosh at

Corrections & Amplifications

This article was corrected at 7:21 p.m. ET because the original version gave an incorrect conversion into U.S. dollars in the eighth paragraph. Mortgages for homes sold at 1 million Canadian dollars ($770,000) or more are not eligible for the insurance.

Mortgages for homes sold at 1 million Canadian dollars ($770,000) or more are not eligible for the insurance. "Canada Eyes Further Rules to Curb Mortgage Growth," published at 2:57 p.m. ET, gave an incorrect conversion into U.S. dollars in the eighth paragraph.

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July 06, 2017 19:35 ET (23:35 GMT)