The big story in the real estate market on Friday was Canada Mortgage and Housing Corporation (CMHC) setting stricter guidelines for its mortgage insurance business.
"The government-backed Canada Mortgage and Housing Corp said on Thursday it would tighten rules for offering mortgage insurance from July 1, after forecasting declines of between 9 per cent and 18 per cent in home prices over the next 12 months. The move would make it harder for riskier borrowers, who offer down payments of less than 20 per cent, to access CMHC’s default mortgage insurance."
Among other changes, minimum credit score requirements are rising from 600 to 680. As well, debt service ratios are now being reduced. This means the amount that one can borrow relative to income is going to be squeezed.
The changes are no surprise in an environment where both private lenders and government want to practice prudent risk management. Rising loan losses and defaults are likely in the months ahead, especially once emergency income programs and payment deferral periods come to an end.
The credit expansion cycle in Canada seems to have more clearly come to an end. Credit tightening and receding access to credit are likely the new normal moving ahead, as lenders want to limit losses and exposure to more riskier loans.
The entry-level part of the residential market is probably going to feel this the most as many first-time home buyers will find it more challenging to qualify for mortgages. This may be painful to the market in the near term, but it's building a more resilient and sustainable housing market for the long-run.