Mortgage stress test rules account for only a small part of the decreased home sales in Canada over the past two years, according to a new study released by Bank of Canada (BoC).
Based on the research, the main causes of declining home sales stray from what others say is clearly a result of the mortgage stress test. BoC says that the increase in home prices and the deflated market bubbles in Vancouver and Toronto have had more influence on reduced home sales than the mortgage qualification rule changes.
Organizations Point to Stress Test
Several organizations involved in Canadian real estate believe that the mortgage stress test was responsible for fewer home sales in 2017 and 2018.
Mortgage Professionals Canada and the Canadian Home Builders’ Association had previously released research that linked the sharp decrease in home sales to two recent mortgage qualification rules: one concerning insured mortgages, that took effect October 2016, and one focusing on uninsured mortgages that came into place on Jan. 1, 2018.
Additionally, Benjamin Tal, deputy chief economist at CIBC World Markets Inc., said in a recent report that the mortgage stress test had a major influence on the 8% drop in new mortgage borrowing from last year. The CIBC study also suggested that, due to the stress test, the amount Canadians borrowed for mortgages in 2018 decreased by around $15 billion compared to 2017.
Several groups are asking for the stress test to be modified. They believe the new rules are preventing too many people from qualifying for a mortgage.
Study Highlights Other Factors
The recent Bank of Canada study suggests that the real estate bubbles bursting in the country’s most expensive markets had far more to do with declining home sales than the mortgage stress test did.
In its study, BoC used micro data at loan level to determine how various factors impacted the resale of existing homes in Canada.
By comparing the first quarter of 2015 with the fourth quarter of 2018, the bank determined that the increasing costs of buying a home would likely have caused a decrease in home sales of 46,000 units over the analyzed period. Higher mortgage rates would account for around 40% of that drop, and the rest would be due to the growth in home prices.
According to the study, the federal government’s stress test would have brought home sales down by another 10,000 units within that time frame, making the total drop in sales reach 56,000.
Offsetting that would have been Canada’s strong labour market and increased migration to B.C., which would have added about 53,000 home purchases across the country.
Based on this information, the Bank of Canada determined that home sales should have declined by around 3,000 units. In reality, sales decreased by 17,000 units. So, why the 14,000-unit difference?
The report ties this drop to the disappearing froth in Greater Vancouver and the Greater Toronto Area. “Froth” refers to market conditions in which high demand for homes drives prices above a reasonable value in an unsustainable way.
Consumers likely lost confidence in price increases and therefore slowed their home purchases because of this, rather than being prevented from buying due to the new mortgage stress test rules.
Largest Cities Could See Slower Recovery
Speaking to the Globe and Mail, Bank of Canada senior deputy governor Carolyn Wilkins said that the increase in Toronto and Vancouver real estate sales in 2015 and 2016 was higher than factors such as population and employment growth would have warranted.
Wilkins noted that the decline in home sales in the two large cities has been more than what should be expected as a result of the mortgage stress test and that the market is experiencing “the kind of under-shooting that you would see as froth works its way off.”
The BoC report states that the impact of the mortgage stress test rules should lessen in most Canadian cities, although perhaps not in the most expensive ones, the Vancouver and Toronto real estate markets. According to Bank of Canada governor Stephen Poloz, the Vancouver and Toronto market adjustments are making it more difficult to keep track of the impact the mortgage rule changes are having at a national level.
As things stabilize in Canada’s most expensive housing markets, home sales should begin to pick up, and any impact the mortgage stress test rules did have should begin to dissipate.