The nation’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), issued the final version of Guideline B-20 on October 17. While the new rules are designed to ensure that homebuyers in the uninsured mortgage market can withstand rising interest rates, some industry sources say it contains a loophole that lenders could exploit to qualify more mortgages.The finalized guidelines would force low-ratio borrowers to qualify based on either the Bank of Canada five-year posted rate or two percentage points above their contract. Both measures mean that consumers should qualify for smaller loans.
However, mortgage experts are now pointing out that OSFI failed to regulate the length of the amortization used in the qualifying calculation, which involves ensuring that only a certain percentage of the borrower’s monthly household income would be dedicated to housing costs.
An extended amortization period reduces the monthly payment at a given interest rate. This means loan providers could extend amortizations from 25 years to 35 years, potentially creating a smaller monthly payment that would qualify more homebuyers.
“You can increase the amortization and clearly you can go longer,” a source told the Financial Post. But the source did not expect the major banks to take advantage of the loophole. “This was done to release some of the pressure [from increased stress testing].”
The real estate industry has been lobbying for some last-minute changes to Guideline B-20, and the financial regulator said it has received more than 200 submissions from federally regulated financial institutions, financial industry associations, and other organizations active in the mortgage market. The general public has also submitted their petitions.
A report from Toronto-Dominion Bank said OSFI’s stress test will likely further slow housing market activity, dampening demand by 5% to 10% once implemented on January 1, 2018.
There has been strong interest in Canada’s commercial real estate in 2017 and the year is expected to set a new record high.
An assessment from Morguard shows that the office sector has led investment in the third quarter with more than $1 billion in sales. There has also been brisk activity in the multi-suite residential, industrial and retail property sectors.
"Investors are continuing to exhibit confidence in Canadian commercial real estate, with projected sales for 2017 surpassing 2016 levels," said Keith Reading, Director of Research at Morguard. "With several significant transactions during the third quarter and a number of high-profile, high-interest properties expected to sell before the end of the year, we are looking at a record year for real estate investment in this country."
He added that downtown centres have shown strong performance and with supply outstripping demand, there has been greater interest in surrounding areas, especially in the GTA and Greater Vancouver.
"With rate hikes showing the desired cooling effect on housing markets, the Bank of Canada is expected to take a more patient approach to interest rates in the near future," said Reading. "The continued and abundant access to low-cost debt and equity capital will power commercial real estate investment into 2018."
With the Canada Revenue Agency (CRA) saying it will ramp up efforts to find tax evaders who earn money by flipping condos while they’re still being built, British Columbia and Ontario’s finance ministers said they are open to the idea of a land registry of pre-construction condo sales.
Charles Sousa, Ontario’s Minister of Finance, said the federal government wants the CRA to enforce the disclosure of assignment sales (also known as shadow flipping). Buyers who engage in this practice purchase condos from developers and sell them to other buyers before they’re completed. The government’s aim is to prevent tax avoidance of any capital gains.
Carole James, BC’s Minister of Finance, said her government has made some changes to make it easier to share information with the federal government, and is also looking into ways it can assist Ottawa in its investigation and audits.
James said the BC government is considering the creation of a registry of condo presales and assignment sales. However, she stressed that this was just one of the many possible options.
Sousa said he’s supportive of any measure, including a land registry, as long as it ensures full disclosure.
The CRA is analyzing 2,810 transactions involving pre-construction condo flipping in Toronto and could carry out audits to identify tax evaders. The federal agency said real estate deals in Toronto and Vancouver have been the subject of greater scrutiny.
OSFI is reinforcing a strong and prudent regulatory regime for residential mortgage underwriting News Release