Alberta Premier Jason Kenney says Ottawa’s mortgage stress test is a solution designed for hot housing markets such as Toronto and Vancouver, and he believes the still-weak Alberta economy deserves an exemption from the process.
The Premier has called it a “prejudicial, regional, unfair" measure that has pushed the dream of home ownership away for some Albertans. He and his ministers have made this argument with their federal counterparts in recent weeks.
It’s clear why Mr. Kenney can make a political argument that the test was designed for other parts of the country. The head of the Canada Housing and Mortgage Corp. (CMHC), Evan Siddall, has bragged that changes to stress-test requirements since 2010 have helped reduce house prices nationally by as much as 3.4 per cent.
That’s a policy win for places such as Vancouver and Toronto, where housing costs have soared and keeping a lid on prices is key. However, that message is cold comfort in Alberta markets, which don’t need any help with decreasing home prices.
“It’s really been challenging,” says Michael Brodrick, chair of the Realtors Association of Edmonton, who contends the economic situation on the Prairies wasn’t considered when stress-test policies were put in place.
“Real estate is hyper-local.”
But backers of the stress test say its real job is to keep people across the country from piling on too much housing debt they ultimately can’t manage. Household indebtedness is a key risk to the Canadian economy as a whole.
Some argue that’s especially relevant in Alberta and Saskatchewan, where consumer debt is high, and continued weakness in the resource-focused economies means the percentage of mortgages in arrears (where payments haven’t been made for three or more months) is significantly higher than in Ontario, Quebec or British Columbia.
Bob Dugan, chief economist for the CMHC, says higher levels of mortgage arrears in the two provinces “would suggest to me that maybe it is important to continue to be careful about the debts that people take on.”
There are actually two stress tests – one for people who are able to make a 20-per-cent or more down payment on their home (an uninsured mortgage), and one for people whose down payment is less than 20 per cent (an insured mortgage). Respectively, the two tests were put in place by the Office of the Superintendent of Financial Institutions, and the federal Finance Minister. Both were created in recent years, and both force borrowers to show they would still be able to make their payments if interest rates went up.
But while both tests have affected the prices of Canadian housing – lowering prices slightly – Mr. Dugan said the purpose of the stress tests is actually to make sure people don’t borrow to the absolute maximum, and can better withstand shocks such as a job loss or an economic slowdown.
But for Alberta, the downturn has already arrived. In Calgary, prices for properties on the detached side of the market have dropped more than 8 per cent since 2014, according to the Calgary Real Estate Board (CREB). For apartment-style condos, prices have dropped 17 per cent. There is excess housing supply in the market.
Some realtors and mortgage brokers say Alberta housing markets that have already been hammered by joblessness and a weak economy are being further restrained by the stress tests. And the provincial UCP government – which has been focused on cutting rules and regulations it says stand in the way of economic recovery – is saying the same, arguing the stress tests are blunt instruments.
“We believe the mortgage stress test is not a tool that is calibrated for Alberta’s housing market and should be targeted to those areas of the country that require interventionist measures,” said Jerrica Goodwin, a spokeswoman for Alberta Treasury Board and Finance.
The province “is seeking an exemption to the mortgage stress test for all mortgages in Alberta, whether they are insured or uninsured.”
Calgary mortgage broker Cory Lewis says she understands why the rules were put in place for Vancouver and Toronto.
“Perhaps areas outside of these over-inflated markets could have been subject to slightly looser guidelines,” Ms. Lewis says. “To paint the whole country with the same brush – it just doesn’t make a whole lot of sense.”
In general, the stress test has cut the borrowing power of individuals by more than 20 per cent. Ms. Lewis notes that some of her clients, many households with single incomes, would be approved to purchase condos in the Calgary area but are no longer able to qualify for a home – despite having a down payment, good credit and minimal debt.
Ms. Lewis said she also gets a call or two each week from people who now don’t qualify for their mortgage on their current home – in many cases because they made the purchase before the stress test was in place. Those people are hindered when trying to get a better rate from a different lender because they will need to pass the stress test if they switch.
The stress test has faced criticism from the housing industry across the country, and there are signs the federal government is open to reviewing the matter. In the mandate letter to Bill Morneau on Dec. 13, the Prime Minister asked the Finance Minister to consider recommendations for making the mortgage stress test “more dynamic.”
There may be tweaks, but concern about the accumulation of household debt will remain, and is likely to continue to guide Canadian fiscal policy. The most significant change to Alberta’s housing market will come if economic forecasts for 2020 and the years ahead come to be, and the province’s jobs and investment picture improves.
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