Opinion: It’s effectively closing the door in the faces of first-time home-buyers
When a mortgage stress test was first unveiled in late 2017 by the Office of the Superintendent of Financial Institutions (OSFI), it was to support the goals of keeping future Canadian homeowners’ financial “heads above water” and preventing “loose” lending. After more than a year in play, it is now apparent that the stress test is causing more harm than good, effectively closing a door in the faces of first-time homebuyers. The time has come for policy-makers to consider how to incentivize homebuyers in Canada, not penalize them.
Let’s dip into some recent history for context. We only have to go back to 2016 and 2017, when prognosticators were predicting a debilitating housing bubble in Canada. Frankly, we were all a bit disoriented by the month-over-month and year-over-year residential price records — particularly in our two largest markets, Toronto and Vancouver. The government of B.C. then introduced a foreign-buyers tax, followed by the government of Ontario. The new tax had a welcomed calming effect.
Then, as the Canadian economy hit a hot streak, measured by exceptional employment data and GDP growth, the Bank of Canada (BoC) began raising interest rates. Given that Canadian households were already at record debt levels, the end of cheap money potentially spelled big problems when it came to mortgage affordability. As a result, the Canadian government prudently and appropriately introduced the OSFI mortgage stress test in late 2017, followed by an augmentation in 2018 to include all mortgages.
This regulation served its purpose. New homebuyers had to prove they had legitimate means to afford a down payment and mortgage in a rising interest-rate environment, which every pundit anticipated in 2019.
Yet, lo and behold, the economy has started to soften, with GDP growth in 2019 pegged to grow by 2.2 per cent followed by a 1.9-per-cent increase in 2020, to say nothing about the volatility created by tariffs and trade woes. As such, the BoC is hitting pause on imminent rate increases.
In other words, the context in which the stress test was introduced is no longer relevant. Interest rates aren’t anticipated to rise as originally anticipated, and homebuyers desperate to enter the market are seeking out unsecured lenders.
Let’s look at the situation as it stands now: Since the stress test for all mortgages took effect, inventory levels have either tightened or expanded depending on the segment of the market. Ten per cent of Canadians no longer qualify for a mortgage with banks. The stress test has cut first-time homebuyers out of many markets in Canada and caused a ripple effect through every tier of homebuyer. It has affected move-up buyers needing larger homes to accommodate growing families. It has created a frenzy in the rental market, since those who no longer qualify for a mortgage are opting to rent.
The bottom line is that the Canadian government needs to find ways to support, even incentivize, homebuyers in Canada (especially first-timers who are facing challenges entering the market) rather than penalize them. While the stress test served its purpose early on, requiring homebuyers to qualify at a “stress rate” that’s two-per-cent higher than the actual rate on a 25-year amortization period is unproductive now that the market has normalized to more reasonable levels.
Being in the industry myself, perhaps my stance sounds self-serving. But the fact is that real estate continues to be one of the safest and most reliable financial investments for Canadians and first-time buyers deserve an opportunity to enter the market. It’s our duty as professionals to educate potential buyers on the mortgage-qualification rules and work with them to help consumers determine the best options for them. We must address the uncertainty head on, rather than encouraging a “wait and see” approach.