Revisiting Mortgage Stress Tests

In 2018, the federal government introduced a new, stricter mortgage stress test that requires all applicants to prove that they can qualify for a mortgage at a higher rate than they will actually pay.

This shift was the latest of seven regulatory tweaks since July 2008 intended to limit the amount of debt that Canadians and banks take on. But this one is proving to have the widest impact.

The prediction was that it would result in mortgage rejections for about 100,000 potential homebuyers, forcing them to either settle for a cheaper home or giving up the homeowner dream altogether.

But with the calendar turning, many in the real estate industry are asking Ottawa to revisit these tight regulations, saying the policy has negatively impacted the economy and cooled housing markets in Canada’s major cities.

John DiMichele, chief executive of the Toronto Real Estate Board, released a statement last week claiming that the stress tests are having unintended consequences across all sectors of the economy. “We have to have an honest discussion on whether or not today’s homebuyers are being stress tested against rates that are realistic.”

DiMichele claims that homebuyers are being asked to qualify for payments nearly $700 more than what they would actually pay. The new rules, overseen by the Office of the Superintendent of Financial Institutions, are meant to cushion against rising interest rates that would eventually raise the payments to that higher level.

But that anticipation is keeping about 100,000 Canadian homebuyers from qualifying for a mortgage that they could afford right now – and causing untold damage to the economy as a result.

While lower fixed rate mortgages this year should help the market rebound, the growth in mortgages will likely remain at it’s slowest rate in almost two decades. Nationwide sales saw an 11.2% drop last year, and sales are predicted to continue falling in 2019, although at a lower rate.

Vancouver is predicted to suffer the most significant effects, according to real estate portal Zoocasa. Last year, B.C. reported a 23% decline in housing dollar volumes and a 23.6% shrinkage in end-of-year sales. Some credit unions are predicted a housing recession in B.C. over the next three years.

Daniel Greenhalgh, ENM co-founder, believes that this kind of continued regulatory meddling will eventually cause chaos in the market.

“We’re already seeing that these high-bar stress tests are dragging our economy down across the country. I’m sure it looks wise on paper, but when you’re keeping hundreds of thousands of people from buying homes that they’ve worked hard to afford, and are able to afford, I think the rules need to be revisited.”

Greenhalgh, like TREB president DiMichele, argues that mortgage applications should always be tested against rates that are realistic in the current economy.

“These rules can create a self-fulfilling prophecy, where you artificially cause a slowdown in a market and then are forced to raise interest rates to keep up. But if you hadn’t clamped down so forcefully, homebuyers would likely have been able to qualify and maintain their payments. It feels like a panic move, and I commend the TREB for pushing Ottawa to soften these stress tests.”