Who is Canada’s Mortgage Stress Test Stressing?
Barbara Lawlor is president and CEO of Baker Real Estate Inc. A member of the Baker team since 1993, she oversees the marketing and sales of condominium developments in the GTA and overseas.
Last year was an interesting one for the Canadian new and resale housing markets. The introduction of the mandated mortgage stress test set out by theOffice of the Superintendent of Financial Institutions (OSFI) had a significant effect, in that both new and resale home sales were down. First-time buyers were especially affected, as most either avoided entering the market or rescinded their offers because they could not pass the test. The stress test requires all people (new and renewal) borrowing from federally regulated lenders such as banks to prove that they can afford future mortgage payments even if interest rates rise substantially. This applies even for mortgages requiring more than a 20 per cent down payment.
I understand the reasoning behind this idea, but I question the logic of applying such a stringent test to first-time new-construction condominium buyers. These residences will take anywhere up to five years before occupancy is available. First-time purchasers are typically at the beginning of their careers, and euring those years, buyers will earn equity, advance their careers and make more money. It is unfair to test them now for financial situations that are years away. In addition, we want first-time buyers to be able to take advantage of our incredibly low mortgage rates.
Looking at Toronto and the GTA, new condos are the most affordable arm of the market. Every developer requires mortgage approval on file for a deal to become firm, and I can tell you we are seeing more cancellations during the 10-day recission period in our arena, because potential purchasers are failing stress tests.
According to all three levels of new home builder associations, the Toronto and Canadian Real Estate Associations and many mortgage professionals and Canadian banking executives, the stress test issue needs to be revisited. Housing is the engine that drives our economy across the GTA, Ontario and Canada, through taxes, job creation and general economic growth. It is critical that we encourage first-time buyers to enter the market to keep this engine running. By all means, they should continue to take careful steps in approving mortgages, but a more reasonable test is in order. It is about balance, and right now, the stress test is outdated.
Balance … balance … balance. In attempting to protect Canadians from ourselves, the OSFI let the pendulum swing too far. I find this often happens in life before balance is achieved. Certainly, conservative Canadian financial practices have saved us from the fate of the U.S. in the past. It is time, however, to revisit Rule B-20 and look at it in the context of what is good for Canadians and Canada as a whole. The ideal big picture includes a steady stream of people buying homes and fueling the economy.
The outlook for the 2019 new home/condo and resale markets is optimistic. Economic drivers include ongoing immigration creating demand, unemployment rates that are expected to remain low for some time, as well as affordability on the world stage. Of course, our incredibly low mortgage rates have a lot to do with that, and we want new buyers to get into the market now while they can take advantage of those. Think back to the late 1980s, when rates topped 20 per cent. We should be grateful to have these low, attainable rates, and we should commit to paving the way for more wannabe home buyers to enjoy them.
The stress test is causing a lot of unnecessary stress. Homes remain the largest and most important financial and lifestyle investments most Canadians will ever make. Robust home sales also speak well to enthusiasm for the future – something all governments should encourage.