This week, the federal government announced that it is changing the stress test rate for insured mortgages starting April 6th. Good news for the banks. Bad news for aspiring home buyers. The government will no doubt spin this as a victory for aspiring young homebuyers, but it’s not. The looser credit will simply fuel more rapid gains in prices, leading to more debt accumulation and debt servicing costs and transferring wealth to existing homeowners via price appreciation.
From the banks’ standpoint, this easing of the regulatory lending guidelines will allow for mortgage loan growth to continue the acceleration it’s been on at the big 6 banks for the last three quarters after very tepid loan growth over the preceding two years amidst the B-20 guidelines, the various empty home taxes, the foreign buyer taxes, tightening the CRA rules for reporting capital gains, etc. The tighter lending criterion has had the unintended consequence of bleeding off loan demand from the Office of the Superintendent of Financial Institutions regulated banks in favour of lenders in the unregulated shadow banking sector, which very likely made the financial system LESS resilient to a potential housing price correction, not MORE resilient, as was intended.
Banks have been lagging the TSX overall since March 2018, which in the absence of recession is an unusually long period of underperformance from this secularly outperforming industry, although the magnitude of underperformance has been shallow at just 11.4%.
At Goodreid, we think this might be the thrust the banks need to regain their relative performance vs. the overall market.
For more background on this story: https://ca.reuters.com/article/businessNews/idCAKBN20E1MM
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