Evidence is mounting that the federal government’s increasingly restrictive mortgage rules have cooled housing markets to the point where too many potential responsible homeowners are being turned away, warns North East Mortgages president Terry Kilakos.
“They went a little nuts,” Kilakos said. “There was a time when you used to be able to get a 40-year mortgage with zero money down, and that obviously needed correction. But the government has gone too far and may be listening to the wrong experts. Every day, we see responsible homeowners with good credit being turned away, or even blocked from refinancing their existing mortgages or consolidating debt. The Trudeau government seems pretty disconnected from the reality new homeowners are facing.”
Kilakos, who has been predicting this chilling effect on potential homeowners for over a year on his weekly CJAD Montreal Real Estate Show and more recently on the North East Mortgages blog, explained that regulatory changes in Canada following the U.S. housing crisis of 2008 “caused chaos in the market,” he said. “Basically, the rules took out 20-30% of people out of the mortgage market.”
Fast forward to late 2017: The federal Office of the Superintendent of Financial Institutions (OSFI) again imposed new rules on the industry that Kilakos estimates could render another 20% of potential Canadian homeowners ineligible for a traditional mortgage.
In the U.S., “there was a lot more chance for default and a lot more chance for people being in foreclosure,” Kilakos said. “In Canada, maybe it’s because of our culture, maybe it’s because of the way that we don’t over-leverage ourselves. We don’t overstretch and because of that we don’t default on our mortgages nearly as frequently as Americans.”
For this reason, Kilakos said the stress test imposed by the government on Canadian financial institutions and other restrictive mortgage rules are unnecessary given that banks have been effective at practicing due diligence in the past.
Not only has the federal government made it more difficult to buy a home, but it has the additional problem of making it harder for people with credit card debt to consolidate what they owe. Kilakos said it’s now much more difficult for someone to roll their toxic, high-interest credit card debt into their mortgage, which has a much lower interest rate.
“Now, unfortunately, they’re in a situation where they have to pay 18 and 19 per cent on credit card, as opposed to being able to roll it all into a mortgage,” Kilakos said.
Many industry experts echo Kilakos’ warnings.
“The negative shock to affordability and purchasing power created by the federal stress test on mortgage borrowers is expected to continue constraining housing demand in the province this year,” an economist with the British Columbia Real Estate Association told Global News this week.
“The context in which the stress test was introduced is no longer relevant, wrote a RE/MAX regional director, in Tuesday’s Financial Post. “Interest rates aren’t anticipated to rise as originally anticipated, and homebuyers desperate to enter the market are seeking out unsecured lenders.”
In the Montreal market, Kilakos warns that the effect on middle class and millennial home-buyers in particular will be devastating, and counter-productive:
“We’re going to see millennials hold off on home ownership even longer when many are beginning to afford it,” Kilakos said, “and the most determined will seek out riskier financial products to get the mortgages done, spending more for nothing in return and increasing the risk of default. It’s often very sad, to be honest, to see people who consistently pay their bills turned away.”