New Mortgage Qualification Rules – More Unintended Consequences

New Home ConstructionAs previously reported here, the B-20 ‘stress test’ mortgage qualification rules (requiring buyers to qualify ‘as if’ the mortgage rate were 2 points higher than it actually is) has resulted in a significant reduction in the number of real estate sales across the country. In turn, this caused an unintended knock-on impact on economic activity due to the spin-off related to real estate sales such as renovations, appliance purchases, etc.

Well, now comes a new study by Will Dunning, a respected housing economist, concluding that new home construction for low-rise homes has taken a massive hit because of the new mortgage rules. The report estimates that B-20 will be responsible for about $8 billion worth of new low-rise construction not happening this year,  more than double the estimated ‘spin-off’ impact of $3.5 billion from reduced home sales.

The Dunning report goes on to say that renovation construction and new condo construction could also be affected by B-20, and that the total impact could be as much as $20-$25 billion in lost investment and up to 200,000 lost jobs. Mr. Dunning surmises that, worst case, “B-20 will be the impetus for a severe recession because homeowners will lose home equity”.

And on another front, Dominion Lending reports that B-20 is increasingly pushing would-be homebuyers to alternative lenders where debt-to-income maxima and interest rates are significantly higher. Of course, should interest rates rise or the economy stumble these homeowners will be at much higher risk of financial trouble, precisely the opposite of what B-20 was supposedly meant to prevent.

One has to wonder if the outcome would have been better if the government had simply left the market to self-correct; or at least walked back the B-20 rules once it became clear that the future direction of interest rates is much more likely down than up. But that never seems to happen; the government always feels that they have to ‘do something’ even though the lessons of history show that intervention almost always does more harm than good. The law of unintended consequences strikes yet again.