Photo: Kurt Bauschardt/Flickr
With Canada’s hottest housing markets cooler and the rock-bottom interest rates that fueled a household debt binge a thing of the past, some may wonder if the federal government’s mortgage stress testing is still needed.
After all, policymakers enacted a stress test for uninsured mortgages in an effort to rein in the Canadian housing market.
The move increased requirements for homebuyers applying for uninsured mortgages. Whereas before they could put down 20 percent and skip out on mortgage insurance — and a stress test — now they had to prove they could afford a mortgage rate 200 basis points higher than whatever the bank was offering.
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In the fallout, national home sales declined and, predictably, prices followed. Still, BC-based realtor and founder of the Vancity Condo Guide blog Steve Saretsky sees reason to keep the test in place.
“I still perceive it as a prudent thing to do to curb household indebtedness,” says Saretsky in an investment podcast by HoweStreet.com.
In fact, Saretsky suggests the arrival of the stress test for uninsured mortgages was belated. It should have been put in place in 2015, when the Bank of Canada slashed its overnight rate, which influences the mortgage rate, to 0.5 percent.
Since April 2017, the central bank has hiked the rate five times, bringing it all the way back up to 1.75 percent. While the Bank of Canada may have taken an aggressive approach, interest rates are by no means high. “It’s still a negative interest rate when you factor in that inflation’s running at 2 percent,” says Saretsky, who notes that low interest rates encourage borrowers to rack up debt.
In fact, Canadian consumers’ debt continues to grow, and bankruptcies are on the rise as well, according to Equifax Canada. Countrywide consumer debt, which includes mortgages, swelled to $1.9 trillion in the final quarter of 2018, up 4.6 percent from the same time last year. Bankruptcies climbed 15 percent in the latter half of last year.
“The fact that households are… being crippled under interest rates that are technically still negative in real terms I think illuminates just how bad the debt problem is,” says Saretsky. “The stress test is obviously a good barrier to keep in place.”
Meantime the Montreal and Ottawa housing markets are now overheating, according to one big bank economist, and a handful of smaller Ontario markets have shown resilience in the first year banks had to stress test uninsured mortgage applicants.
Saretsky is open to the idea of adjusting the stress test in the future. “I think, yeah, you could certainly make that argument,” he says. For now, it’s too soon to tell what, if any, changes should be made. “We’ll see how the housing market transpires moving forward.”