But like a giant game of Whac-A-Mole, the risk to the financial system from tapped out borrowers is merely shifting – this time to a market where there’s no oversight from the country’s national bank regulator and new stress-test rules don’t apply.
“We’re transferring risk from the regulated segment to the unregulated segment of the market,” Canadian Imperial Bank of Commerce deputy chief economist Benjamin Tal told Bloomberg. “If we have a significant correction, clearly the unregulated markets will suffer even more because that’s where the first casualties would be. And then you will see it elsewhere.”
Mortgage broker Samantha Brookes agreed with the observation, saying that more than 90% of her business since November has been lining up funding from non-bank and private sources, or shadow banks, versus a 50-50 mix previously.
“People aren’t going to stop buying, they’ll just find different ways of doing it,” Brookes said.
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For the government, it may be a case of careful what you wish for. Anxious to prevent a repeat of the kind of taxpayer-funded bank bailouts that occurred in the U.S. after its housing crash a decade ago, the federal government has been moving to reduce its exposure to the mortgage-insurance market.
Rules last year added a stress test for insured loans backed by the government. That sent more buyers to the uninsured space, where a 20% down payment is required. As of January 1, these borrowers will also need to qualify at a rate two percentage points higher than their offered rate, a move which could lower mortgage creation by as much as 15%, Canada’s bank regulator has said.
The rules, along with other measures such as a foreign-purchase tax, have had an initial bite, with Toronto house prices falling 8.8% from May to November and the average price of a home posting the first annual drop since 2009. Vancouver prices have reclaimed new heights after cooling earlier this year.
But the risks to the financial system haven’t gone away. In the uninsured space, mortgages are increasingly going to highly indebted households and for amortizations for longer than 25 years, the central bank said. And like Brookes’s clients drowning in house debt, more borrowers are turning to lenders whose activities fall outside federal regulatory scope.
These include credit unions and mortgage-investment corporations, pools of money from individual shareholders, which aren’t subject to the new rules, Tal said. Credit unions hold about 17% of uninsured mortgages, according to the Bank of Canada.
Amid a scarcity of viable financing choices, a growing number of Canadians are moving towards private unregulated lenders, even as the federal government is trying to rein in a home-price surge that has driven household debt levels to record highs.