Mortgage Stress Test had a big impact on Canadian Housing Industry
A new report from the Canadian Imperial Bank of Commerce estimates that Canada’s new Mortgage Stress Test cost the Canadian Housing Industry between 13 and 15 billion dollars last year.
The CIBC says the total value of new mortgages in Canada dropped by 8 percent, or 25 billion dollars last year. CIBC Deputy Chief Economist Benjamin Tal estimates between 50 to 60 percent of that drop was because of the new Mortgage Stress Test, which came into effect on January 1st, 2018.
Tal says other 40 to 50 percent of the drop comes from increasingly unaffordable home prices and rising interest rates.
Home sales in most parts of the Country have fallen pretty significantly since the new rules came into effect. The Canadian Real Estate Association says sales across the country fell by almost 6 percent last year, with average prices dropping by almost 2 percent.
CIBC Economist Tal says the new rules did help protect Canadians from over-spending on their accommodations, but thinks it might be time to relax the rules a little bit.
“I think that B-20 was necessary in order to save … some borrowers from themselves,” said Tal in an interview, referencing the official name for the test. It came into effect last year and requires homebuyers to prove that they can service an uninsured mortgage at a higher rate than they qualify for in order to receive a loan from a federally regulated lender.
“However, I think that it has to be a little bit more flexible, more dynamic,” he said.
Tal says the B-20 mortgage stress test consider the impact of rising interest rates. The Bank of Canada has raised it’s benchmark rate by 75 basis points since it came into effect.
“It’s much more severe now than it was when it was introduced,” Tal said.
Tal says if interest rates go higher, the stress test will get even tougher.
The new Mortgage Rules require all home-buyers to qualify for a mortage at a higher rate than they will actually have to pay.
For example, the best 5 year mortgage rate available in Saskatchewan today is 2.74 %, but the Bank of Canada’s qualifying rate is currently 5.34 %. The stress test is based on qualifying for the greater of either the Bank of Canada qualifying rate, or the contracted rate plus 2 %.
What does that mean for an average buyer in Saskatchewan?
Under the old rules, if a buyer could afford a monthly mortgage payment of $1,500, and they had a 10 percent downpayment, they could afford to purchase a $360,000 home.
But under the new rules, that same buyer, with the same downpayment, would only qualify to purchase a $284,000 home.
The Federal Government has been under a lot of pressure lately to relax the rules to allow more people to become home owners, and to kick-start a struggling housing industry. With an election coming up in the fall, it will undoubtedly be something we hear about a lot in the coming months.