Canada’s mortgage stress test has been in the news a lot recently due to calls for its reform.
Leaders across the financial industry are urging for changes to Canada’s new mortgage rules, which came into effect on January 1, 2018. We have rounded up the different viewpoints and what others are saying about the mortgage stress test.
Mortgage Professionals Canada
Mortgage Professionals Canada has been one of the most vocal proponents of stress test reform. In its January 2019 Annual Report, authored by Chief Economist Will Dunning, it noted that housing markets across Canada slowed significantly in 2018 due to a combination of higher mortgage stress tests, higher interest rates, and other policy changes that have “constrained” home buying.
To the stress test specifically, Dunning wrote, “The mortgage stress tests are raising the risks to house prices and the economy of Canada.”
He also said that the B-20 guidelines, meant to remove risk from the housing market, are actually having the opposite effect by driving a greater share of buyers to alternative lenders that are not federally regulated.
In early May 2019, TD Economics joined the stress test conversation when it issued a new report.
“By our reckoning, the B-20 has lowered Canadian home sales by about 40k between 2017Q4 and 2018Q4, with disproportionate impacts on the overvalued Toronto and Vancouver markets and on first-time homebuyers,” the report stated.
They speculated about what would happen if the B-20 regulations were immediately removed, projecting that “All else equal, nation-wide home sales and prices could be around 8% and 6% higher, respectively, by the end of 2020, compared to current projections,” and would “represent a significant near-term boost to housing activity, though at a longer-term cost of worsened affordability.”
Overall, TD called for “maintaining flexibility going forward with respect to tweaking the B-20 rules, especially if circumstances change or if housing markets continue to undershoot expectations.”
CIBC World Markets Deputy Economist Benjamin Tal
In April 2019, CIBC World Markets Deputy Economist Benjamin Tal released a report that attributed an 8% drop in mortgage originations from 2017 to 2018 directly to the B-20 regulations.
Tal said that the stress test met what it set out to do, but the effects have hurt the housing market.
According to Tal, the impacts of B-20 translate into a $13-$15 billion drop in lending activity in 2018, caused by fewer borrowers. Tal recommended that regulators revisit B-20 and provide a “more flexible benchmark, potentially a narrower spread over the contract rate when interest rates approach cyclical peak, and perhaps to establish a reasonable floor under which the qualifying rate will never drop below.”
The Canadian Real Estate Association (CREA) says that the mortgage stress test is largely responsible for a drop in home sales.
“…Many prospective homebuyers remain sidelined by the mortgage stress test to varying degrees depending on where they are looking to buy,” said Jason Stephen, CREA’s president, as quoted on Canadian Mortgage Trends.
The BCREA came out with its own report saying the stress test is creating “pent-up demand” for would-be B.C. homebuyers who are forced to wait on the sidelines.
“The sharp erosion of affordability caused by the B-20 stress test is now creating pent-up demand, as many would-be homebuyers are forced to wait on the sidelines,” said BCREA Chief Economist Cameron Muir. “Unfortunately, new home construction is slowing as well, which will likely lead to another housing supply crunch down the road.”
OREA CEO Tim Hudak wrote a recent article for the Financial Post citing similar sentiments and noting that B-20 has done damage to the market “beyond what many thought was the worst case.”
“Not only are many people unable to become home owners at all; others can’t upgrade as their families grow, which in turn means they aren’t selling their starter homes to people trying to buy for the first time,” Hudak wrote.
The Office of the Superintendent of Financial Institutions, which implemented the B-20 guidelines, addressed criticism in February 2019.
Assistant Superintendent Carolyn Rogers spoke to the Economic Club of Canada in Toronto on February 5 about the B-20 rules. Rogers acknowledged the criticism of B-20 but emphasized that the answer cannot be more debt for Canadians.
“The escalating cost of homeownership in Canada, and its knock-on effects to the economy and to society, is a problem. And it’s a problem that is proving very challenging to address,” Rogers said.
“But the answer to this important problem, cannot be more debt. Particularly, it cannot be more consumer debt, fuelled by lower underwriting standards.
“Recent history has shown that relaxing bank underwriting standards can lead to extreme and persistent levels of financial instability that more than undo any economic gains they were intended to support.”
Teranet Market Insights Report
In the 2019 Q1 Teranet Market Insights Report, Teranet data scientists found that mortgage lender retention dropped by 24% after B-20 came into effect. They also discovered that more mortgage holders moved away from B-20 lenders and toward credit unions, private lenders, and trust companies.
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