Stop blaming mortgage stress tests for killing the housing market

When things go wrong in the housing market, people get angry.

So expect to hear a lot of irate commentary on whose fault it is if house prices keep falling in Toronto and other places where people have been making lots of money off the housing boom. The narrative is already taking shape: The introduction of mortgage stress tests for home buyers by the federal government’s banking regulator has ruined the housing market and, in particular, hurt first-time buyers.

Allow someone who doesn’t make a living off the sale or financing of real estate to set you straight on all of this. What’s happening in housing is actually healthy. Slowing the market down now lessens the risk of a plunge that would traumatize this country worse than any stock-market crash ever.

The stress tests ensure you can afford a mortgage if rates climb well above current levels. In some cities, people are finding that the house they want to buy wouldn’t be affordable if they had to pay a higher mortgage rate. The housing-industrial complex says this is bad – a cruel denial of every Canadian’s right to live the dream of home ownership.

The stress test, in fact, has proved to be a blunt instrument in how it can restrict people who already own a house from changing lenders on renewal. But if you look at what’s going on with interest rates right now, you’ll see how needed it is. The cost of fixed-rate mortgages has been rising this year and pressure is building for more increases. This is exactly the kind of stress regulators were thinking of when they introduced the stress test.

Buyers knocked out of the market by the stress test are being saved, not persecuted. People forget that today’s interest rates are still incredibly low by historical standards. We may never get back to the old normal on rates, but you have to be able to handle higher borrowing costs if you have a mortgage.

In the real estate sector’s blame game, the economy is another victim of the misguided attempt to address soaring home prices. Housing is a pillar of the economy, the argument goes. Constraining it hurts us all if the result is an economic slowdown.

An RBC Economics report from a year ago said 5 per cent of the economy is highly exposed to a sales slump in housing. That may undersell the impact of a sustained fall in house prices. If houses are falling in value, consumer confidence will decline and so might spending. Cumulatively, the economy could be seriously affected.

Given how far house prices have risen in some cities, a pullback of some sort is pretty much inevitable at some point. We have zero chance of avoiding a situation where the housing sector acts as a drag on the broader economy. Should we still be angry at the mortgage stress tests for triggering a housing slowdown in some cities? Couldn’t we have waited and let things unfold without intervention?

No way. There’s a housing mania in this country that has to be stopped before it collapses the entire market. Recent example: A report by CIBC World Markets and Urbanation Inc. found that investors accounted for at least 48 per cent of all buyers who took possession of newly built condos in the Greater Toronto Area last year. At least 44 per cent of those investors with a mortgage are currently in a negative cash flow position, which means rents charged to tenants don’t cover their mortgage payments and condo maintenance fees.

This isn’t shrewd investing. It’s desperate speculation that distorts the housing market and adds to the danger of an outright crash in housing that is worse than anything caused by the mortgage stress test.

Despite the stress test, the housing market is thriving in some cities. Prices in Ottawa, Montreal and St. John’s were up 6 per cent to 8 per cent in April compared with the previous year, while the crazy Vancouver market was up 14.3 per cent.

In Toronto and surrounding cities, the mortgage stress tests are doing the important work of protecting lenders and borrowers in overheated markets at a time of rising interest rates. Given how emotionally and financially overinvested we are in housing, it’s natural that some people are angry about this.