Canada's Condominium Magazine
If you bought a home before the middle of last October and if you had a less-than-optimal down payment, otherwise known as taking out a high-ratio mortgage, you might consider yourself lucky today. According to the Bank of Canada, many people in your position would not qualify for a mortgage under today’s rules. This is one of the findings in the central bank’s latest review of the financial system.
Its purpose is to look at the strengths and weaknesses of the system so that governments can take action if that is required. The report identifies three key vulnerabilities, two of which concern the housing market. The three vulnerabilities have not changed since the last review came out in June.
Elevated household debt is the first, and the report notes that new policy initiatives introduced since June will affect that vulnerability by “improving the quality of future borrowing.” The high indebtedness is mainly the result of high mortgage borrowing. Strong home price growth and high household debt reinforce each other, the report says, as rising indebtedness is supported by strong growth in mortgage and consumer credit. Especially worrying is the continuing increase in the proportion of borrowers with large mortgages relative to their income. In Toronto, nearly one-third of borrowers have mortgages with a loan-to-income ratio of over 450 per cent, meaning their mortgage is four and a half times larger than their annual income.
Toronto home buyers might well say, “What am I supposed to do, with the cost of homes in this city?” Well, according to the BoC, they could have chosen a less expensive home, reduced their non-mortgage debt, or made bigger down payments. Under today’s rules, that is what they will have to do. The average mortgage borrower in Canada would have to reduce his or her mortgage by 10 per cent in order to meet the new criteria.
As for the second vulnerability, imbalances in the housing market, rising home prices have driven the cost of a home to just under six times the average household income on a national basis. In some markets, “adverse economic shocks” could cause home prices to fall, creating financial stress for households and for lenders and mortgage insurers. This has already happened to some extent in Calgary and St. John’s, with mortgage arrears rates rising slightly and house prices falling. As of now, the effects of the new housing finance rules are not “visible” in market data, but will show up in the next six months.
In addition to the key vulnerabilities, there are also key risks that could destabilize the financial system. The number one risk is household financial stress caused by, for example, a large and persistent rise in unemployment, and a sharp correction in home prices. While this is unlikely to happen, it is still considered an “elevated” risk. It probably won’t happen, but if it did, the impact would be severe.