The Canadian mortgage market may face a meaningful slowdown in 2018 – potentially leading to some price relief for buyers in hot housing markets like Vancouver and Toronto, but also possibly causing some pain for alternative lenders – and rising interest rates aren’t the only culprit.
New proposals for tighter mortgage underwriting standards (B-20 guidelines) from the Office of the Superintendent of Financial Institutions (OSFI) could lead to a five to 10 per cent decline in uninsured mortgage origination volumes, and even sharper pullbacks for the alternative lenders.
The proposed changes unveiled by the Office of the Superintendent of Financial Institutions (OSFI) on July 6, would require stress tests to qualify for all uninsured mortgages (roughly 80 per cent of the market), and would make the qualifying rate for these mortgages the contract rate plus two percentage points.
“This could reduce purchasing power materially for some borrowers,” said Graham Ryding, a financial services analyst at TD Securities.
While his industry feedback suggests an overall volume decline in the five to 10 per cent range, Ryding noted that alternative lenders are the most sensitive to such changes and could therefore see volumes fall approximately 15 to 20 per cent.
The analyst highlighted Equitable Group Inc. and Home Capital Group Inc. as the most sensitive to potentially lower volumes stemming from stricter underwriting standards.
“However, we continue to believe Equitable is optimally positioned to gain further market share due to Home Capital’s pull-back, which could somewhat offset,” Ryding said in a research note.
Since Genworth MI Canada Inc. and First National Financial Corp. are more focused on insured mortgages, the analyst doesn’t anticipate the proposed changes will directly impact their business, and could make it more affordable for first-time home buyers if prices decline.
“If you really want to influence the market, you have to influence the non-insured segment of the market,” Benjamin Tal, deputy chief economist at CIBC World Markets, said after the proposals were unveiled.
Atrium Mortgage Investment Corp. is another potential beneficiary, as Ryding noted it could boost its market share in the single family home segment, as the company is not regulated by OSFI.
The analyst’s top picks remain Equitable Group and Genworth MI Canada Inc.
