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“Right now people are staying away from buying,” Dunning said by phone. “If they stay away over a longer period of time, that could become dangerous, that could become deflationary.”

Stress Tests

The Office of the Superintendent of Financial Institutions announced Thursday it is considering three measures targeting over-leveraged borrowers in the uninsured mortgage market, which comprises about half the $1.5 trillion mortgages outstanding in the country. They include asking lenders to stress test uninsured mortgages, or those borrowers who put at least a 20 per cent downpayment, and matching the loan-to-value ratios, or the loan amount compared to how much the house is appraised at, with local market conditions.

If finalized, the OSFI requirements would hit the alternative lending market harder than Canada’s six big banks. In such a scenario, residential mortgage debt growth would slow to as little as 2 per cent each year from 6.3 per cent now, Royal Bank of Canada analysts including Geoffrey Kwan and Darko Mihelic wrote in a July 9 note titled “Cruel Summer.” Laurentian Bank Securities analyst Marc Charbin downgraded Home Capital to a hold from buy rating, forecasting a slowdown in loan growth. He also lowered the target price for the alternative lender and its rival Equity Financial Holdings Inc.

Craziest Markets

A rate increase from the central bank may price people out of the property market but it’s not necessarily a bad thing, said Craig Wright, chief economist at RBC Capital Markets. A debt-to-income ratio hovering near a record “suggests the economy and consumer sector is more sensitive to smaller increases in interest rates than we’ve seen in the past,” he said. “It will have an impact — it’s exactly what rates are supposed to do. But it’ll be a cooling in the market, not a collapsing.”

James Laird, president of brokerage CanWise Financial, is seeing an increasing number of clients refinancing and renewing to lock in the low rates. That’s why he said a single rate hike won’t have much of an impact, and he’d only be worried if tightening is stepped up to about 300 basis points. Laird also welcomes the return of rationality.

“It was one of the craziest real estate markets I’ve experienced in the last 10 years,” he said. “The bidding wars were wild. That pivoted fairly quickly this spring.”

Bloomberg