The federal government’s mortgage stress test was designed to ensure borrowers and lenders would be okay in a world of higher interest rates.
The test, introduced Jan. 1, 2018, is both a simple and sensible way to temper risky behaviour. To qualify for an uninsured mortgage, home buyers must now prove they can afford rates that are two percentage points higher than what they actually pay.
And yet in the real estate industry, the stress test has become a scapegoat for everything bad happening in the housing market – from slowing sales and soaring rents, to first-time buyers being shut out of the market. Calls for Ottawa to scrap or relax the stress test are growing louder.
“The additional unnecessary layers of government intervention have left many feeling pushed out of the market, or uncertain of it,” Christopher Alexander, regional director for Re/Max in Ontario and Atlantic Canada, complained in a recent news release. He wants the test eliminated.
Unfortunately, the argument is a little too self-serving. What really worries real estate agents, mortgage brokers, home builders and developers is the cooling housing market. The boom of recent years has been great for business, and no one wants it to end.
So, please, don’t pretend it’s about making homes more affordable for young Canadians.
The surest way to make an asset cheaper is to let a market crash. So if these new apostles of affordability truly believe the stress test is killing the housing market, prospective home buyers are in for a treat. All they have to do is wait for prices to tumble.
The reality is considerably more complicated. There are many reasons why the market has gone flat in cities such as Vancouver, Toronto and Calgary. The economy has slowed a lot – from 3-per-cent growth in 2017, to 2 per cent in 2018 and a projected 1.7 per cent this year.
The posted rate on five-year fixed mortgages has risen by roughly a third of a percentage point in the past year.
In Alberta, the oil price slump and resulting job cuts have taken a toll.
Also dampening activity are the measures introduced last year by Ontario and British Columbia aimed at deterring speculators and foreign buyers.
Bank of Canada Governor Stephen Poloz insists the stress test isn’t a prohibitive barrier. Buyers can choose to buy smaller homes in a less pricey neighbourhood if they can’t afford a mortgage. And sellers can always lower asking prices if buyers aren’t biting.
The days of soaring prices, bidding wars and expectations that the frenzy would go on forever were not good for first-time buyers.
“That is a much more dangerous situation for affordability,” Mr. Poloz told reporters last month. Compared with surging prices, the stress test is a “much smaller element in the big picture,” he added.
It’s also not obvious that Canada is facing a home-ownership crisis. The rates of home ownership for all Canadians, and millennials in particular, are substantially higher than in most other developed countries, including the United States, according to a recent report by Royal Bank of Canada economist Robert Hogue. Even in the priciest Canadian cities, Toronto and Vancouver, ownership rates are high by international standards.
The bottom line is that the stress test is working as intended. Tracking by the Bank of Canada shows the quality of new mortgages has increased markedly in recent months. And that means fewer borrowers are dangerously overextended.
But the evidence is still fresh. The new mortgage rules are barely a year old.
There are plenty of ways to boost demand for housing. Ottawa could raise the maximum mortgage amortization period to 30 years from 25 years, boost the tax credit available to first-time home buyers or raise the amount buyers can take out of their registered retirement savings plans.
Indeed, most industry groups are proposing variations on these various solutions in their pitches to Finance Minister Bill Morneau as he puts the finishing touches on his March 19 budget.
The Liberal government will be tempted to do something to help home buyers, and throw something to an insistent real estate industry. But should it?
The government would be wise to clearly identify the problem before rushing in with solutions that could actually make homes less affordable and further inflate household debt.
And it should think twice before watering down a measure that is making the housing market safer, just to appease a badly conflicted constituency.