It’s time for the federal government to update the mortgage stress test
It has been nearly two years since the federal government’s mortgage stress test was first introduced with the intent to cool the hot Canadian housing market. Since then, particularly in the GTA and Vancouver, there has been a softening of demand in the housing sector as the market adjusted and potential homebuyers looking to purchase a new home have stepped off the sidelines. In the GTA, the stress test did its job in reducing demand, but did so by shutting out hundreds of thousands of potential homebuyers. It did nothing for the real issue, that being that the GTA has a housing supply problem.
The stress test came into effect in 2018 to protect consumers by limiting the amount of money they could borrow for a new home. It meant that all home purchasers have to qualify under the Bank of Canada benchmark five-year rate (5.34 per cent) or the rate offered by the lender plus 200 basis points or two per cent.
Unfortunately, the stress test addressed demand and not supply. Home prices stabilized because tens of thousands of young families and newcomers to Canada were locked out of the housing market. In markets with growing populations, it is very difficult to solve supply side problems with demand side solutions. Furthermore, reducing demand did not improve affordability because any stabilization of pricing was matched with reduced spending/borrowing ability.
Why do we have a supply issue? The GTA’s population is growing at the rate of 115,000 per year and the inability to build enough new homes fast enough is a problem. We are falling short by about 10,000 units a year. The result is the affordability challenge we have seen across the GTA over the last five to 10 years. Demand side measures like the stress test have only proved to be a bandaid solution.
With markets now stabilized, and the cumulative effects of changes now surpassing the original policy goals, it is time for the federal government to update the stress test to better align it with current market conditions, specifically replacing the current “blanket” two-point stress test with a declining rate stress test based on the mortgage term. The Canadian Home Builders’ Association (CHBA) has some recommendations that would see the stress test remain unchanged for mortgages with open terms and variable rates, but reduced for fixed rate, locked-in terms, eventually diminishing to 0.75 for terms of five years, and be eliminated entirely for seven- or 10-year terms.
The CHBA also recommended reintroducing 30-year amortization periods for first-time buyers. First-time homebuyers have been inordinately affected by the federal government’s changes, yet they are amongst the lowest-risk group of buyers. It’s time to reintroduce the 30-year amortization for insured mortgages taken on by well-qualified first-time buyers. This will address growing inequities in mortgage access that disproportionately impact younger first-time homebuyers trying to enter the housing market.
Implementing the CHBA recommendations would return the top 64 per cent most qualified of buyers to the market and would allow 89 per cent of first-time buyers, a low risk group, to re-enter the market with the hope of homeownership. Those returning would still be lower-risk as they would still need to pass the adjusted stress test, debt service ratios, down payment requirements, credit rating scores and mortgage insurance requirements.
Dave Wilkes is President and CEO of the Building Industry and Land Development Association (BILD).