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The Ontario housing market has been quieter than average in the past year. While many are blaming the mortgage stress test for the so-called slowdown, is that really the primary reason?

Some say not quite. We have rounded up various opinions from across the Ontario financial industry as to why the provincial housing market cooled. Here is what they had to say:

Bank of Canada

In a recent report, Disentangling the Factors Driving Housing Resales, the Bank of Canada (BOC) concluded that the mortgage stress test played a small role in the housing market slowdown, but it was not the only factor.

They pointed to “deteriorating affordability” and a “dissipation of previous froth in the market” as larger causes.

“The direct impact of recent mortgage rule changes, in contrast, is estimated to be relatively small, while robust labour markets across many provinces are providing some underlying support to resales,” the BOC wrote in its report.

In Ontario in particular, the BOC pointed to the foreign buyers’ tax.

“Similarly, in Ontario, house price expectations rose strongly until the second quarter of 2017 when the Ontario Fair Housing Plan also introduced a 15 per cent tax on non-resident home purchases,” the BOC wrote.

“The declines in resales following both provincial policy measures far exceeded the number of non-resident homebuyers in these markets. This suggests that the largest impact of the policies came through shocks to expectations of domestic homebuyers (see Khan and Verstraete 2019), which appear to explain a large share of the deviations in resales from fundamentals over the period studied.”

CIBC World Markets

CIBC World Markets Deputy Chief Economist Benjamin Tal wrote a paper calling for a more flexible benchmark in the B-20 guidelines.

Tal identified that the mortgage stress test accounted for at least half of the decline in new mortgages started in 2018.

The total value of new mortgages fell by 8%, or $25 billion in 2018, wrote Tal.

He estimates the impact of the new stress test made up $13 billion to $15 billion — or 50 to 60% — of that drop. The other 40 to 50% of the drop comes from increasingly unaffordable home prices and rising interest rates, he said.

“The stress test imposed on the market was probably necessary, since there was a need to save some Canadian borrowers from themselves,” Tal wrote. “But is 200 basis points the right number?”

In answering that question, Tal stated that the B-20 rule was introduced in a slowing housing market. Since then, the Bank of Canada has increased interest rates by 75 basis points and the five-year mortgage rate has gone up by 35 basis points.

“Furthermore, borrowers’ income is likely to rise during mortgage terms,” Tal wrote. “Average personal income has risen by a cumulative 12.5% over the past five years—the stress test does not take that into account.

“Nor does B-20 allow for the fact that during the course of the mortgage term, equity position rises due to principal payments.”

TD Economics

TD Economics released a report in early May citing that the new mortgage rules “distorted sales activity both before and after implementation.”

“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.

According to the TD report:

  • Sales dropped by around 20% after the new mortgage rules came into effect in the first three months of 2018 with broad-based declines across almost all provinces.
  • The average purchasing power of households was reduced around 20% compared t business as usual levels.
  • The uninsured mortgage market, which TD said accounted for at least 70% of new mortgage originations, was targeted by the policy.

The “magnitude of the recovery” was also adversely affected by rising interest rates and severely strained affordability conditions, TD wrote.

Canadian Home Builders’ Association

The Canadian Home Builders’ Association released a report in February 2019, Access to Mortgage Financing a Growing Problem for Home Buyers.

In the report, the CHBA referenced results from a survey of its home builder and developer members.

According to the CHBA survey, nine in ten builders report that their customers experienced more difficulty when qualifying for a mortgage in 2018 than in the previous year. And 84% of builders also reported an increase in the number of completed home purchase agreements that subsequently failed due to a financing problem.

As a result, they also reported a 33% drop in first-time homebuyers.

CHBA CEO Kevin Lee stated, “We know why the stress test was put in place, but given that economic and housing market conditions have changed, and considering the impact that all of the mortgage rule changes have had on first-time buyers, we do think it’s time for some policy adjustments.”

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