Boom years in the Canadian real estate market led to concerns that a dangerous housing bubble was forming. The ‘B-20’ mortgage stress test was introduced at the start of 2018 with the intention of limiting high-risk lending, and with the knock-on effect of moderating property prices—but has it gone too far?
Canada’s Declining Property Markets
Together with other factors, the mortgage stress test has had a big impact on the country’s real estate markets, putting some into decline. For example, by the end of March 2019 the average house price in the British Columbia real estate market declined by -5.0%. In the Newfoundland and Labrador real estate market the figure was -4.4%, and for Alberta real estate it was -2.2%. Some other provinces saw an increase, but the overall figure for Canada was a decline of -1.7%.
|Region||Change in Average House Price
March 2019 vs March 2018
|Prince Edward Island||16.8%|
|Newfoundland & Labrador||-4.4%|
Large markets such as Vancouver real estate and Toronto real estate can skew the province-level figures somewhat—plus there are the foreign buyers’ taxes in those two places. And then there are the rising interest rates which apply to all prospective home-buyers. But it’s the mortgage stress test that has been coming under scrutiny recently concerning the lack of vitality in the markets.
The Mortgage Stress Test to Blame
A report recently released by CIBC World Markets Inc. states that in 2018 the total value of new mortgages fell by $25 billion over the previous year, which is a decrease of 8%. Crucially, it also claimed that slightly more than half of this decline could be directly attributable to the stress test. The rest of the drop could be attributed to rising interest rates and the increasing unaffordability of home prices, it said.
The usefulness of the stress test is now being questioned in some quarters. Broadly speaking, the big Canadian banks have been in favour of the idea, but a report just released by one of the country’s leading banks sought to provoke by suggesting that while the mortgage stress test maybe was a success, the effect on home-buyers was a lot less desirable.
The Broader Economic Picture
Looking at the broader picture, business columnist Don Pittis reminds us that the Bank of Canada has been pursuing a policy of leaving interest rates comparatively low, aiding the overall economy, and just using the mortgage stress test to address the country’s overheated housing markets. The facts that Canada’s interest rates cannot realistically deviate too far from the US’s and that the government needs to ensure that the banks stay safe seem to make this a reasonable idea.
Pittis offers a historical perspective. Back in 2008, the global crisis that originated in the US due to subprime lending was addressed there with low interest rates. Canada did not really have the same problems—its property markets hadn’t significantly crashed—but it had to follow suit to a large extent, leading to distortions that are now becoming visible in the housing market.
What Should Be Done with the Mortgage Stress Test?
So, should it be business as usual with the mortgage stress test or is it no longer a good idea? Benjamin Tal, deputy chief economist at CIBC World Markets Inc., suggests that it could be restructured:
“I think that B-20 was necessary in order to save … some borrowers from themselves. However, I think that it has to be a little bit more flexible, more dynamic.”
Such a change would certainly help buyers— the ‘shared equity mortgage‘ announced in the recent budget could assist them but maybe not enough.
Other factors also seem to speak in favour of the test’s continuation in some form, with CREA’s chief economist Gregory Klump stating that:
“While the mortgage stress test has made access to home financing more challenging, the good news is that continuing job growth remains supportive for housing demand and should eventually translate into stronger home sales activity.”
With measures such as the stress test in place, getting onto the home-buying ladder continues to be a tough task—the granting of household credit is increasing only very slowly, as if the economy were in recession. And yet Canadians now have a level of debt that is growing faster than their income, which sounds a word of caution.
Average-wage earners are still priced out of many Canadian markets, even those with falling prices. And for those with the added burden of not being able to borrow easily, it may be that something should be done with the stress test. Alternatively, all things considered, it could be that B-20 actually fits rather well into Canada’s economic planning.