Trudeau’s government imposes stricter mortgage rules, as the central bank shows concerns over the real estate market

Following a new wave of concern from the Bank of Canada on buyers’ excessive debts, the country’s officials show more efforts to cool the Canadian red-hot real estate market, imposing stricter mortgage qualification rules.

As you know, Prime Minister Justin Trudeau’s government set a new benchmark interest rate  to determine whether borrowers can qualify for insured mortgages. The decision follows the same measures taken by the Office of the Superintendent of Financial Institutions (OSFI) in April towards uninsured mortgages.

On Thursday, the OSFI announced the new rules would take force starting June 1.

The changes followed a warning from the BoC’s Governor Tiff Macklem saying the Canadians shouldn’t suggest that interest rates will stay so low forever or that significant prices growth will go on.

“It’s extremely important to keep homeownership affordable for Canadians,” – stated Finance Minister Chrystia Freeland.

The changes are introduced amid a sharp increase in real estate prices, which is raising concern among policy makers and economists. Low borrowing costs combined with work-from-home trend have caused a strong demand increase for more spacious homes. As a result, house hunters with their bidding wars pushed prices higher all over Canada.

Canadians are so worried by the red-hot housing market that, according to the recent Nanos Research Group survey for Bloomberg News, almost half of the respondents want the central bank to increase borrowing costs in order to reduce the housing demand and stabilize prices.

However, the new measures seem to be only additional steps, and not a significant policy change.

Under the new rules, home buyers will have to prove they can withstand a minimum rate of 5.25%. Meanwhile, today’s threshold, based on posted rates of Canada’s six biggest lenders, is 4.79%. According to economists, the stricter qualification rules will decrease the buying power of households by almost 5%.

CIBC’s deputy chief economist Benjamin Tal doesn’t think the measures will have a strong influence on the current housing price trends.

“This is definitely not a game changer and it was highly expected,” – he noted.

The new rules from the government and the OSFI appeared only a few hours after the BoC released its annual financial stability report, pointing to the increasing vulnerabilities coming from overleveraged households and housing market speculation. It named three urban markets – Toronto, Hamilton and Montreal – as showing excessive activity, and Ottawa was about to join the list.

According to Macklem, some Canadians have taken on “significantly” more debt, and many households are carrying too large mortgage loans compared to their incomes. He says, borrowers and banks have to understand that interest rates will not always be so low, and buyers will not be able to rely on growing values forever.