Photo: James Bombales
Instead of safeguarding Canada’s financial system, one association says the mortgage stress test is unduly suppressing housing activity, which could spell future trouble for the economy.
Since the new mortgage stress test was implemented on January 1, roughly 18 per cent of prospective homebuyers were unable to buy their preferred home, according to a new report from Mortgage Professionals Canada (MPC), published Wednesday.
Housing Market News Alerts
Sign up now for news alerts on the Canadian housing market
“I think there’s no question that there’s a significant number of folks who have been disqualified from purchasing a home,” Paul Taylor, president and CEO of Mortgage Professionals Canada tells Livabl.
“The stress test effectively reduces everybody’s borrowing ability. It also stifled an awful lot of what would be sort of move-up buyers,” he adds.
The semi-annual report uses consumer surveys to provide insight on the housing and mortgage market in Canada.
The stress test was implemented by the Office of the Superintendent for Financial Institutions (OSFI) and requires all uninsured mortgage borrowers to qualify against the Bank of Canada’s five-year benchmark rate, or at their contract rate plus an additional two per cent. This policy follows a similar stress test introduced in 2016 for insured mortgages.
Since January, home sales have fallen across Canada, as consumers wait on the sidelines to see the impact of the stress test and increasing interest rates.
However, if home sales continue to slow, MPC’s Taylor notes that prices will start to erode and this could cause homeowners to pullback on consumer spending. This could precipitate a dangerous scenario for the overall economy.
“When [their home] starts to be worth less people start to be concerned about their economic future. They stop spending, they start saving more, they don’t go out on the weekends. And so that has economic knock on consequences for local restaurants and other service providers,” Taylor says.
In addition, he adds that a slowdown in sales could be seen as a breather in overheated metros like Toronto and Vancouver, but easing sales is not a welcome change across the country .
“In some other areas of the country where the economy is not already firing on all cylinders —Alberta and some of the Atlantic provinces — these policies can actually have quite a dampening economic impact,” says Taylor.
MPC do not oppose the stress test, but conclude that the current rate could be reduced to three quarters of a per cent while still being effective.
“We just think that that two per cent rate at the moment is too high. It doesn’t take into account expected increases in people’s incomes over time. It doesn’t seem to take into account the fact that five years in you’ll have down paid quite a lot of equity in your home and so your debt outstanding is actually going to be reduced,” says Taylor.