Banks back builders in stress battle

February 15, 2019

Canadian homebuilding and real estate organizations now have a muscular ally in the battle against the federal government’s mortgage-stress test: big banks, which are sharing the pain of lower incomes.
Mortgage growth has shrunk to a 17-year low in Canada. Residential mortgage growth was posted at 3.1 per cent in December from a year earlier, the slowest pace since May 2001, and half the growth rate of two years ago, noted Dr. Sherry Cooper, chief economist with Dominion Lending Centres.
Residential mortgages are the single-largest source of revenue for Canada’s big banks.
In early February economists at CIBC and the Bank of Montreal blamed tightened qualification requirements for slowing mortgage activity.
“While raising the qualification rate by 200 basis points might have made sense 18 months ago, when [leading] housing markets were red hot and interest rates were at record lows, we are in a very different place in the economic cycle today,” Cooper said in explaining the banker’s argument, 
“The Bank of Canada has raised the overnight benchmark policy rate by 75 basis points since the introduction of the new measures, which begs the question of whether 200 basis points is still the right number,” she added.
The Office of the Superintendent of Financial Institutions introduced the B20 rules in January 2018. The regulation forces people who want a new uninsured mortgage to demonstrate they can manage payments at rates two percentage points above what’s being offered by a lender. The new rules have been brutally effective in cooling household borrowing and reversing the gains in overheated housing markets. It is estimated that they have cut a typical buyer’s purchase power by 25 per cent and sidelined many first-time buyers.