Justin Trudeau Tightens Mortgage Rules After BoC Warns of Housing Risks

Canada’s federal government has decided to intervene in the country’s red-hot housing market, shortly after the Bank of Canada warned of imminent household debt risks amid surging real estate prices.

On Thursday afternoon, Prime Minister Justin Trudeau raised the benchmark interest rate that sets the criteria for whether or not potential homebuyers qualify for an insured mortgage via Canada’s housing agency. The latest move coincides with an earlier April decision by the country’s banking regulator to also set a new rate for uninsured mortgages.

The rule change— set by the Office of the Superintendent of Financial Institutions— is expected to come into effect beginning June 1. The latest step is in response to a Thursday morning warning from the Bank of Canada, cautioning Canadians to not expect historically low interest rates to remain in place for the long-run, nor expect the sharp escalation in housing prices to continue.

Canada’s housing market has been surging throughout the pandemic, as historically-low borrowing rates, coupled with work-from-home flexibility, enticed potential homebuyers to seek more spacious housing. This sharp increase in demand has forced housing prices to jump to record-highs, creating concerns that some Canadians may soon be priced out of the market, or taking on too much debt.

With the latest changes, Canadian homebuyers will now have to prove they can afford the minimum interest rate of 5.25%, instead of the current threshold set at 4.79%. According to economists cited by Bloomberg, the latest rate increase is expected to cut back the purchasing power of households by approximately 5%. “It is vitally important that homeownership remain within reach for Canadians,” said Finance Minister Chrystia Freeland in a statement.

The measures from the federal government and the regulator come mere hours after the Bank of Canada published its annual Financial System Review, which showed that households are becoming increasingly over-leveraged amid speculative housing activity. The report highlighted three key housing markets— Toronto, Hamilton, and Montreal— as showing signs of excess “exuberance,” with Ottawa also nearing that threshold.

Information for this briefing was found via the Government of Canada and Bloomberg. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.