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Report on Business TD says home prices could rise if mortgage stress test rule is removed

Home sales and prices would both rise sharply in Canada if the federal government lifted its tough new mortgage qualification rule, a new report predicts.

A Toronto-Dominion Bank analysis estimates the volume of home sales nationally would climb by 15 per cent by the end of 2020 if the B-20 mortgage stress test rule was removed, a steep increase from the current forecast sales gain of about 7 per cent over the same period.

The report also predicts average home prices would rise by 10 per cent nationally by end of next year if the rule was lifted and all other factors remained the same, up from TD’s current prediction of a 4-per-cent average price increase.

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Vancouver and Toronto would likely see an even greater impact if the test was lifted, the report says, but it does not quantify the potential price gain in those markets.

TD economist Rishi Sondhi said the analysis does not draw conclusions about whether removing the stress test would be the best policy option for first-time home buyers who are hampered by current borrowing rules, but said it appears the change would push prices higher for them over time.

“I think it’s quite clear that affordability would be impacted, and housing would by and large be less affordable as prices increased as demand was stimulated,” Mr. Sondhi said Tuesday. “So I think it would likely be a bit harmful for affordability.”

The federal government has faced calls from several real estate organizations to ease the stress-test rule, which they argue is too harsh and is keeping many buyers out of the market, especially in expensive cities where buyers are closer to their affordability limits.

The rule, implemented Jan. 1, 2018, requires buyers to prove they could still afford their mortgages even if interest rates were to rise by two percentage points above the level they negotiated with their banks.

Paul Taylor, chief executive officer of Mortgage Professionals Canada, which represents the mortgage lending industry, said he agrees with the TD analysis that complete removal of the stress test would send prices higher. But he said his organization has called for the test to be eased, not eliminated.

Mortgage Professionals Canada has proposed reducing the test to 75 basis points from 200 currently, which would help people struggling to get into the market.

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“B-20 adds [sales] suppression, and we just want to ease the suppression,” Mr. Taylor said Tuesday. “We’re not trying to add fuel to a fire, we just want to stop pouring quite so much water on it.”

Between the fourth quarter of 2017 and the fourth quarter of 2018, TD estimates the stress-test rule reduced home sales in Canada by about 40,000 units, which translates into a 7-per-cent reduction in national home sales during that time. In the first three months of 2018, when the rule first took effect, sales were down 20 per cent nationally, and 30 per cent in Vancouver and Toronto, it said.

The TD report said the B-20 rule has brought housing activity down to a “more sustainable level,” but said there is scope to change the rule if housing markets are too sluggish and undershoot expectations.

While provincial policy changes and rising interest rates have also had an impact on home sales, the TD report said the stress test has “by far” been the most meaningful recent policy development that has had an impact on home sales in Canada.

The Bank of Canada released an analysis last week suggesting two changes to stress-test rules in late 2016 and the start of 2018 were responsible for only a small part of the drop in home sales in Canada since 2016, while higher interest rates, higher home prices and a “dissipation of the froth” in major markets in Ontario and British Columbia have played a bigger impact on sales.

In addition to curtailing sales, the stress-test rule has also contributed to lower vacancy rates in Vancouver and Toronto as more people stay in rental units because they can’t afford to buy a home. It has also driven down home building as preconstruction sales have fallen, the report said.

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