Few if any would suggest that mortgage stress testing introduced last year by the Canadian government had no impact on home sales in BC, but how just how much of a role did the rule change have in cooling the market?
The British Columbia Real Estate Association (BCREA) recently conducted a study to find out just that, though the analysts behind the number-crunching exercise admit it’s not a perfect science.
“Since B20 [stress testing] applies across all Canadian markets, we do not have a suitable control group to use as a baseline for comparison,” writes BCREA Deputy Chief Economist Brendon Ogmundson alongside colleague and fellow economist Kellie Fong.
Guideline B-20, which was drafted by federal banking watchdog the Office of the Superintendent of Financial Institutions, included expanding mortgage stress testing to uninsured mortgages.
Effective January 2018, mortgage applicants with downpayments of at least 20 percent — the minimum to avoid insurance — had to qualify at a rate a full 2 percentage points higher than the contract rate.
As the stress-testing policy is Canada-wide, BCREA ran its outdated forecast model, which didn’t consider stress testing, to get an idea of where home sales might have stood in 2018, before applying several models that do.
As per the pre-stress-test model, BCREA suggests home sales across the province would have totalled 90,500, representing a drop of 11,000 sales from 2017 and the result of higher interest rates, affordability woes and a weaker economy.
Yet home sales in 2018 actually sank to 78,346. “[T]his means that factors outside of those explicitly controlled for in the model need to explain about 13,400 additional lost sales,” explain the BCREA economists.
The study doesn’t suggest the stress test claimed all of those would-be sales — but the average lost sales over 12 months averaged a 10-percent decline, or an additional 7,500 transactions across the five models BCREA did run.
In the most severe case, 11,500 transactions (a 15-percent change in sales) were wiped out, while in the mildest case, 5,300 sales (7 percent) never occurred because of the stress test
“On average, we estimate that B20 accounted for about 30% of the total downturn in BC home sales observed in 2018,” conclude Ogmundson and Fong.