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Canada’s Mortgage Stress Test: Is It Working as Intended?

Written by Posted On Tuesday, 02 July 2019 15:28
Canada’s Mortgage Stress Test: Is It Working as Intended?

When the Canadian government introduced new mortgage regulations for first time homebuyers in 2018, most Canadian’s agreed that something needed to be done to combat the sky-high housing prices in Vancouver and Toronto. Though, many raised concerns that the policy was unfairly targeting first time buyers, when there were countless factors leading to high prices.

Now, over a year later, those concerns have grown and many in the industry are arguing that the stress test is having too great of an affect on the housing market, leading to calls for the plan to be revisited, if not done away with altogether.

What Is the Stress Test?

The name “Stress Test” might be a little misleading—though it has caused first time buyers a great deal of stress—as the policy involves a set of requirements that banks must follow when qualifying a mortgage, rather than a test. The policy was created to prevent buyers from borrowing more than they could afford and falling into delinquency when interest rates rise.

Under this policy, buyers are qualified at a higher interest rate than offered by their bank, based on the 5 year rate for the Bank of Canada, which is currently 5.34%. So even if your bank is offering you a much lower rate, say 3.4%, buyers will be tested based on the Bank of Canada’s posted rate.

This is where the headache begins for some buyers, because it significantly reduces their buying power due to the fact that a buyer must be able to afford a mortgage payment which is actually much higher than their mortgage payment would be.

It’s easy to see why a first time home buyer would find this frustrating, knowing that they can afford a mortgage payment on the home of their choice, only to find out that they cannot qualify for a higher mortgage payment that they may never need to pay.

Why Is It Controversial?

With prices being so high in Toronto, the reduction in buying power hits especially hard—that coupled with the competitive nature of the market, means that some buyers simply cannot compete.

At strata.ca our bread and butter is helping buyers, sellers, and renters navigate the Toronto condo market. It’s not just about helping a client sell their condo or placing a buyer in a condo as fast as possible; we see a buyer’s disappointment first hand when they’re forced to adjust their expectations, or in some cases, bow out of the market.

Of course, it should come as no surprise that those in the industry aren’t happy with the stress test; TREB (Toronto Real Estate Board) have asked the policy to be reviewed, along with allowing 30-year amortizations for mortgages that are federally insured, which would reduce mortgage payments. President of TREB, Garry Bhaura, has argued that “mandated mortgage stress test has left some buyers on the sidelines who have struggled to qualify for the type of home they want to buy.”

Another criticism has been that the policy was meant to protect buyers from defaulting, rather than curbing prices. And considering that the default rate is roughly 0.3% in Canada, one can hardly claim that there’s a crisis or a significant chance of Canadian’s defaulting on their mortgage payments.

Evan Siddall, the CEO of CMHC, has defended the policy and is adamant that “The stress test is doing what it is supposed to do,” As well as arguing that “Critics of the stress test ignore the fact that high house prices are the overwhelming reason why home ownership is out of reach.”

Is the Stress Test Working?

In a sense, it is. There have been numerous reports about the slow down in Vancouver, and the Toronto real estate market had a slow start to 2019 as well, before roaring back in recent months.

Unfortunately, none of this has had any significant impact on affordability in Toronto, and you can make the case that homes are actually less affordable under the policy, as buyers need more income to qualify.

It’s true that high prices have led to many buyers being left out in the cold, and the lack of supply in Toronto makes the market that much more competitive. Until the provincial government can find a way to vastly increase the housing supply in the Greater Toronto Area, high demand will ensure that prices continue to rise.

Seeing as the goal of the stress test is to keep first time homebuyers from borrowing too much, reducing debt is a great way to increase the chances of qualifying under these conditions—as is looking for homes in less competetive neighbourhoods. In the meantime, the stress test is just one more hurdle that first time buyers will need to jump in order to achieve their dreams of ownership. 

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Robert Van Rhijn

Robert Van Rhijn is a Toronto based Realtor and Broker-of-Record at Slate Realty Inc. He founded Strata.ca in 2018 — a Toronto condo website featuring data and analytics you don’t need to be a statistician to understand. You can connect with Robert at robert@strata.ca.

https://truelofts.ca/

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