If there is a single reason why Canada’s real estate industry has been complaining so loudly about the country’s mortgage “stress test,” new research from economists at TD Bank points straight to it. The test for uninsured mortgages, introduced in January of 2018, “sidelined” 40,000 potential home purchases in its first year, as buyers were forced to stay put and save up larger down payments, TD Economics said in a report issued Tuesday. The test has had “disproportionate impacts on the overvalued Toronto and Vancouver markets and on first-time homebuyers,” the report stated.
If the test were removed today, Canada’s average house price would rise by 10 per cent by the end of 2020, the report predicted, roughly in line with price growth during the heady days before the market slowdown. Without the test, TD sees prices rising by 4 per cent in that time. “The removal of the (mortgage stress test) would represent a significant near-term boost to housing activity, though at a longer-term cost of worsened affordability,” the report concluded.
The mortgage stress test requires mortgage borrowers to qualify for a loan effectively at a rate two percentage points higher than the one they’re being offered, and has reduced the maximum amount that a homebuyer can borrow by about 20 per cent. As predicted, the rule had the greatest impact on the priciest markets, where buyers are most likely to need to borrow the maximum to afford a home.
The TD Bank economists argued the test has done what policymakers set out to do — to reduce home sales to a more “sustainable” pace. “For the most part the rules are working as intended,” report co-author Ksenia Bushmeneva said. But “we were not expecting weakness in the housing market to last as long as it has,” she told HuffPost Canada by phone. For that reason, the situation should be monitored, in case the test needs to be tweaked.
Not just the stress test
If the market is weaker than expected, it may have to do with the fact that other factors are dampening demand for housing in Canada today. In a report issued last week, the Bank of Canada estimated that less than a fifth of the decline in home sales between 2015 and 2018 was due to the stress test; rising house prices and rising mortgage rates — which pushed affordability to its worst levels in three decades — were responsible for the majority of it, the Bank concluded. Critics noted the Bank’s model largely overlooked the impact of international investors, and the drop in demand seen in Toronto and Vancouver in the wake of provincial foreign buyers’ taxes and Beijing’s crackdown on money leaving China. Still, Bushmeneva said the mortgage stress test was the “most important” factor in the housing slowdown.
The report noted some unintended consequences from the stress test, one being rising rents. With fewer people able to afford to buy a home, more have been staying put in apartments, increasing the demand for rental housing. “Immigration into these two landing pad cities (Toronto and Vancouver) is likely to increase in this year and next, putting additional strain on their rental markets,” the report predicted. The sales slowdown following the stress test has also prompted developers to start construction on fewer units, the report noted, potentially creating a supply problem down the road. For these reasons, the mortgage stress test “requires continuous monitoring,” Bushmeneva said.