Recap & Macro Outlook: Follow-up: New Canadian Mortgage Regulations

Christian Anthony, CFA | Portfolio Manager

Over the last two years, we have been highlighting significant activity in the Canadian mortgage market. In late 2016, the government imposed strict regulations on insured Canadian mortgages which led to a substantial slowdown in insured mortgage lending.  This was significant but the overall impact was muted because borrowers simply shifted to uninsured mortgages which saw a meaningful jump in borrowing last year. The government took notice and retaliated with significant new regulations on uninsured mortgages. At that time, we highlighted that these new regulations could have a negative impact on bank loan growth, Mortgage Investment Corporations (MICs), Canadian house prices, and the Canadian economy.  These regulations took effect on January 1st and given the potential significance, we thought a follow-up was warranted.

While early, the early impact of these regulations seems significant. In Toronto, the dollar value of residential real estate resale was down 43% in February Y/Y.  In Vancouver, the same number was down 3%, far less than Toronto but a significant slowdown from the 31% Y/Y growth seen in December.  We have also heard from local sources that the government resale data is overstated as it includes sales when the paperwork is filed, not when the actual sale closes.  In other words, February data includes sales from December and the Y/Y declines are actually much worse. Finally, Statistics Canada announced that the total amount of residential mortgages outstanding at the end of February was down since the end of 2017.  The total amount of mortgages outstanding had been growing steadily in Canada since the financial crisis.

While the data seems significant, we are just two months into measuring the impact of these regulations; in other words, it is too early to draw a strict conclusion.  Also, the new regulations are not the only factors at play. We highlight that higher interest rates, enhanced B.C. taxes on foreign buyers, and new anti-money laundering forces in B.C. could also be playing a major role in this data.

“This means that”  While too early to draw a strict conclusion, initial data suggests that new mortgage regulations are having the impact we feared.  When combined with higher interest rates, enhanced B.C taxes on foreign buyers, and new anti-money laundering enforcement in B.C., we again highlight the potential negative impact on bank loan growth, Mortgage Investment Corporations (MICs), Canadian house prices and the Canadian economy.

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