OREANDA-NEWS. New Canadian Department of Finance mortgage rules to reduce speculation in residential real estate are a step toward cooling the housing market in major cities including Toronto and Vancouver, says Fitch Ratings. The new rules could result in improved credit quality in certain residential covered bond programs.

The rules include applying an interest rate stress test for all insured mortgages starting on October 17; previously, this was only required for homebuyers with a down payment of less than 20% of the home purchase price or for mortgages of less than five years. Tightened mortgage insurance eligibility requirements for "low-ratio" mortgages - mortgages for less than 80% of a home's purchase price - will also be applied from Nov. 30. The government has also proposed to no longer exempt non-residents from paying capital gains taxes on income from selling a property.

Fitch believes that the new measures may temper the housing market, especially in cities that are significantly overvalued. According to a Fitch study published earlier this year, home prices across Canada are estimated to be about 25% above their sustainable value with major regional variations.

The income tax rule change in particular should reduce housing demand from foreigners. In Vancouver, this will reinforce the effects of the 15% tax on foreign home purchases put in place by the British Columbia government in August. Data from the Real Estate Board of Greater Vancouver indicate that average sale prices of detached houses have already dropped by roughly 16%, led by higher priced properties.

The new mortgage insurance guidelines could improve portfolio credit quality in the Canadian registered covered bond programs. While insured mortgage loans are prohibited from securing this subsector of the covered bond market, changes to insured mortgage loan underwriting requirements could influence non-insured mortgage loan underwriting requirements. Any tightening of non-insured mortgage loan underwriting requirements would further help to cool the housing market and also help to address the concern of heightened borrower leverage.