As markets like Toronto and Vancouver stabilize and the impact of new regulations is absorbed, Bank of Canada Governor Stephen Poloz said in a recent speech to the Canadian Credit Union Association he’s confident the nation’s housing sector will return to growth later this year.

Poloz downplayed the effect of higher policy rates and tougher mortgage qualifications in the recent cooling, painting instead a picture of a sector still supported by a growing economy and labour market. For markets like Toronto and Vancouver undergoing adjustments, Poloz said, it’s mostly due to local circumstances.

“Fundamentals of the Canadian housing market remain solid, and growth will resume once the effects of reduced expectations for house price inflation and the new mortgage guidelines have been absorbed,” said Poloz.

Froth

He blamed the cooling of markets in Toronto and Vancouver to a build-up of froth in recent years that had been driven by “extrapolative expectations” for price gains. These expectations had fuelled speculative demand and prompted other buyers to rush in for fear of missing out in those markets.

“What we take from this is that it is not higher interest rates and changes to mortgage lending guidelines that have had the greatest effect on housing,” said Poloz. “Rather, it is their interaction with froth that matters most.”

There is little evidence the Bank of Canada’s five interest rate increases since 2017 are having an impact on borrowing costs for mortgage renewals this year, largely because of a recent drop in global bond yields, says Poloz.

“From our initial look at individual loan-level data in 2019, we see that mortgage payments did not rise for most borrowers who recently renewed a five-year, fixed-rate mortgage,” he said.

Poloz also continued to champion tougher mortgage qualification rules that have recently come under attack by the real estate industry. He said that to the extent these new measures have curbed demand, they’ve also made the financial system more resilient and helped reduce speculative behaviour.

Imaginative Approach

The mortgage system was working well but could benefit from an imaginative approach, Poloz suggested, such as encouraging more people to take out longer fixed-rate mortgages.

He said 45% of all mortgage loans had a fixed rate and a five-year term. Just 2% of all mortgage loans issued in 2018 were fixed-rate loans with a term of longer than five years.

Longer terms mean consumers face the risk of having to renew at higher rates less often and also can build up more equity in their homes between renewals.

“I can see how longer-term mortgages can contribute to a safer financial system and more stable economy,” he said.

Poloz also said it could be helpful to develop a private market for mortgage-backed securities which could be a more flexible source of long-term funding for uninsured mortgages.

These securities could become another option for investors but would have to be designed carefully. Poloz noted that mortgage-backed securities were at the heart of the sub-prime debacle that preceded the 2008 financial crisis.

Homeowners in Canada cannot currently buy mortgage insurance for houses that cost more than $1 million or if they are buying a second property.

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Financial Post, “Bank of Canada’s Stephen Poloz issues ’call to arms’ for mortgage market innovations”, accessed May 8, 2019, https://business.financialpost.com/real-estate/mortgages/poloz-champions-tougher-mortgage-rules-says-housing-market-will-start-growing-again