Lexpert Magazine

58 LEXPERT MAGAZINE | JANUARY/FEBRUARY 2017 In October 2016, lawmakers ratcheted up their interventionist efforts with a re- strictive mortgage "stress test." is mea- sure now requires all homebuyers with less than a 20-per-cent down payment to have enough income, aer all household debt and expenses are taken into account, to qualify for the same mortgage at the Bank of Canada's five-year posted rate — 4.64 per cent at the time of writing. at measure and others unleashed a flood of criticism from a variety of dispa- rate stakeholders. First-time homebuyers, mortgage brokers and alternative lenders all cried foul simultaneously, arguing that the government, in trying to cool the hous- ing market, would be favouring big banks over smaller specialty mortgage lenders, while putting a dent in the brokerage in- dustry and disqualifying thousands of Ca- nadians from home ownership. However, prominent economists and money managers like MacBeth say the federal government is doing exactly what it needs to be doing. In his view, a perfect storm of factors — low interest rates, laissez faire policies, foreign buyers and alternative mortgage lenders — have set the Cana- dian housing market up for a big fall. He says it's already underway in Alberta, Sas- katchewan and Newfoundland and will inevitably spread. If it looks anything like the subprime debacle in the United States, the crash would unfold steadily over a span of four year or so. "e bubble will burst, and it will be a hard landing, which means a greater than 20-per-cent decline in house prices," says MacBeth. In fact, he says, Canadian prices could decline from current levels by 40, even 50 per cent by 2020. "is means some financial institutions will get into trouble. [e Canada Mortgage and Hous- ing Corp.] will lose billions, and there will be a recession." Indeed, CMHC itself has suggested that an abrupt increase in interest rates — as little as 1 per cent — could cause housing prices to dip 30 per cent and increase un- employment to as high as 11.3 per cent. In forecasting the housing market's future, and its impact on both lenders and borrow- ers, MacBeth says, "the proper stance for everyone is to prepare themselves for this. And to try to find a way to survive without too much damage." COURSE REVERSAL is past decade, the federal government — first under Stephen Harper, now under Justin Trudeau — has made six rounds of changes to tighten mortgage eligibil- ity rules. e latest, announced by Finance Minister Bill Morneau on October 3, have all been in effect since the end of November. Apart from the aforementioned stress test, the new mortgage rules affect how the state-owned CMHC and two private mortgage insurers, Genworth MI Canada Inc. and Canada Guaranty Mortgage In- surance Co., will insure future Canadian mortgages. ey will curb the ability of lenders to make loans to some Canadians who would have qualified for mortgages. For instance, to qualify for mortgage insurance under the new rules, a bor- rower's gross debt service ratio (mortgage payments, taxes and heating costs as a per- centage of income) must be no more than 39 per cent. A borrower's total debt service ratio (the carrying costs of the home and all SAMANTHA GALE CANADIAN MORTGAGE BROKERS ASSOCIATION These rules are a broad brushstroke. … It was a mistake to launch such broad sweeping changes without consultation. … At the end of the day, the market always takes care of itself. … And when you interfere with the market, it never turns out well. | IN-HOUSE ADVISOR: MORTGAGE REGULATION |

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