Bank of Canada backs tighter mortgage stress test amid hot housing market

Bank of Canada backs tighter mortgage stress test amid the hot housing market

House Prices

Central banks worried that soaring demand for homes coupled with limited supply could lead to speculation and cause economic strain. 

The Bank of Canada is acknowledging that limited housing stock is spurring strong price growth across the country, but expects recent policy initiatives to help rebalance the market, according to its latest monetary policy report.

The Central bank on Wednesday threw its support behind a tighter mortgage stress-test proposal and measured outlined in the budget designed to cool the red-hot housing market, which has been spurred by unique economic conditions borne out of the pandemic.

“With so many households working and studying at home, we see many people want more space, and interest rates have been unusually low, making borrowing more affordable. While the resulting house price increases are rooted in fundamentals, we are seeing signs of extrapolative expectations and speculative behavior,” central bank governor Tiff Macklem told reporters.

“Given elevated levels of household debt and the risks that households may overstretch in the face of rising housing prices, we welcome the recent proposal by the Superintendent of Financial Institutions to introduce a fixed floor to the minimum qualifying rate for uninsured mortgages. New measures just announced in the federal budget will also be helpful,” Macklem said.

The Office of the Superintendent of Financial Institutions (OSFI) this month proposed strengthening the mortgage stress test in a move that would dampen demand on housing. Beginning in June, the qualifying rate for uninsured mortgages will be either two percentage points above the market rate or 5.25 percent — whichever is higher. The current qualifying rate is 4.79 percent.

References:

https://financialpost.com/news/economy/bank-of-canada-backs-tighter-mortgage-stress-test-amid-hot-housing-market

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