Despite today’s mortgage borrowers having to qualify at rates in excess of 6% and 7%, Canada’s banking regulator said no changes to the stress test are imminent.

In a speech last week, the head of the Office of the Superintendent of Financial Institutions (OSFI), Peter Routledge, threw cold water on the prospect of the regulator making any tweaks to its stress test for uninsured mortgages, or those with down payments of 20% or more.

“The uncertainty and anxiety caused by a rising interest rate environment have, understandably, caused some Canadians to advocate for a loosening of the underwriting standards in Guideline B-20,” he said in his prepared remarks. “Let me reassure those of you who oppose a loosening of underwriting standards that OSFI will not do that.”

He touched on increased risks in today’s environment, including elevated inflation and the corresponding rapid rise in interest rates to try and bring it back under control.

“Rising policy interest rates will lead to higher debt servicing costs which, combined with heightened inflation, will pressure Canadian households,” Routledge acknowledged.

Among five key actions he said the regulator will take in the year ahead, Routledge said OSFI will “intensify its focus on residential mortgage underwriting due to prevailing conditions in housing finance.”

He said OSFI’s Guideline B-20, which governs mortgage underwriting practices and procedures, “gets an extraordinary amount of public attention,” and that, “we accept this reality – housing is crucial to all Canadians and Guideline B-20, whether we at OSFI like it or not, matters to Canadians. And so, our job is to address concerns with B-20 transparently and forthrightly.”

He did say the regulator will “evaluate” B-20 to “ensure [federally regulated financial institutions’] residential mortgage underwriting meets high underwriting standards.”

“We are constantly evaluating the [Mortgage Qualifying Rate] to measure its efficacy in sustaining sound residential mortgage underwriting as well as the risks of pro-cyclicality,” he said.

Earlier this month, the Toronto Regional Real Estate Board called on OSFI to “weigh in” on whether the mortgage stress test is still applicable in this period of elevated rates.

“Is it reasonable to test homebuyers at two percentage points above the current elevated rates, or should a more flexible test be applied that follows the interest rate cycle?” asked TRREB CEO John DiMichele.

“In addition, OSFI should consider removing the stress test for existing mortgage holders who want to shop for the best possible rate at renewal rather than forcing them to stay with their existing lender to avoid the stress test,” he added.

Housing inventory could reach a “crisis point,” says RE/MAX

Despite a drop in real estate activity since interest rates started rising, Canada’s real estate market is facing a housing inventory shortage.

That’s the conclusion of a recent RE/MAX report, which found active listings in July are running below the 10-year average in nearly all markets, based on data from the Canadian Real Estate Association (CREA).

The organization’s Housing Inventory Report, based on Canadian Real Estate Association data and insights from the Re/Max network, examined active listings in July from 2013 to 2022 in eight Canadian centres and found inventory levels have fallen short of the 10-year average in seven of them in 2022.

The declines are most pronounced in Halifax-Dartmouth (65.5% below the 10-year average), Ottawa (down 42%), Montreal (down 40%) and Calgary (down 26%).

“Population growth and household formation have played a significant role in depleting inventory levels from coast to coast over the most recent decade, triggering chronic housing shortages in large urban centres that resulted in mini ‘boom’ and ‘bust’ cycles,” said Christopher Alexander, President of RE/MAX Canada. “If we don’t move now to build more housing in the current lull, it’s expected that this same scenario will continue to resurface over and over again.”

The report noted that Canada is expected to welcome 1.2 million immigrants between 2021 and 2023, in addition to growth in new international students. At the same time⁠—exacerbated by falling home prices⁠—new housing starts and purpose-built rentals “continue to fall short,” the report noted.

“The challenge is that we need a new development and growth strategy that is geared toward the long-term outlook,” Alexander said. “Although demand is currently softer than we’ve seen in the last two years, it is expected to rebound, and our market is not prepared for when that happens. We’re seeing fewer housing starts at a time when we should be getting ready for the next inevitable upswing.”

Home Capital share buyback misses expectations

Alternative mortgage lender Home Capital revealed on Wednesday that its plan to buy back as much as $115 million worth of shares fell short of expectations.

Instead, the company secured just 1.5 million shares valued at $44.3 million, it said in a release.

“While we were able to return $44.3 million to participating shareholders, the fact that the tender offer was not fully subscribed indicates that many of our shareholders see the potential for additional upside value in our shares,” President and CEO Yousry Bissada said in a statement. “Given our robust capital levels, we will continue with our efforts to create value through our capital program while retaining sufficient capital to support our business growth and maintain financial flexibility.”