‘Vast majority’ say housing market getting tougher
Stress test puts brakes on younger buyers
On his way to making Jimmy Carter a one-term U.S. president, Ronald Reagan famously asked Americans if they were better off then than four years earlier. As Canada's 2019 election approaches, the Conservative Party is hoping to put a modern spin on that old classic.
“Am I better able to afford a home than I was four years ago?” asked Conservative MP Tom Kmiec, the party's deputy finance critic, in an interview. “The vast majority of people say they're not.”
The Calgary MP said he's been hearing, primarily from people under 35, that the raft of policies governments have introduced recently to pacify the housing market has still left them with no hope of buying a home — a frustration polls show is widespread. And anyone refinancing a mortgage who can't pass the stress test introduced at the start of 2018 will be locked in with their current lender. That means these homeowners are deprived of one of the few sources of leverage they have over the banks: the ability to shop around.
Industry players have been ramping up calls to repeal or reduce the impact of the stress test, which requires anyone applying for a mortgage to prove they can handle interest rates two percentage points higher than their current rate. Mortgage Professionals Canada has been calling for the stress test cutoff to be reduced to 0.75 per cent, or for the return of a 30-year amortization period, and was among the most active lobbyists on Parliament Hill in September and October, according to a Hill Times report.
“We need to find a way to help people make a down payment,” Kmiec said. “It's a combination of things that are now making it unaffordable for young people to buy a home.” He mentioned the stress test, rising CMHC insurance premiums and various other measures provincial and municipal governments have introduced as they've looked to calm the furious waters of Canada's housing market, particularly in Vancouver and Toronto.
Kmiec said he's “not set on any specific objective,” especially before the effects of the policy have been studied. He has been pushing unsuccessfully to have the House of Commons finance committee study the effects of the mortgage stress test. In April, Bank of Canada governor Stephen Poloz said the bank needs a year's worth of data before a worthwhile study can be conducted — a milestone just a few weeks away.
Poloz said the mortgage stress test wasn't so much about house prices as making sure Canadians weren't holding risky debt.
“The biggest risk we face in the financial system is that household debt is not able to cope with a more normal level of interest rates,” Poloz said during an October finance committee meeting. “If people can afford (a mortgage) today but can't afford it 100 basis points from now, then we're not doing them any favours.”
Early reports, though, suggest both intended and unintended effects from the stress test are already underway. A November report by CIBC said residential mortgage growth has slowed more than anticipated, possibly due to rising rates combined with the stress test, although it's hard to untangle the two threads.
And on top of recent policies, the CIBC report notes that “many mortgages are now rolling over at higher rates for the first time in a quarter-century,” which could be startling, although not entirely unexpected for homeowners.
The most tangible effects of the new policies are among different age groups, with mortgage originations for millennials, aged 24 to 38, down 19 per cent, said a recent report by Trans-Union.
The same report found that Canadians aged 73 to 93 are taking out mortgages at a staggering growth rate of 63 per cent more than last year. Kmiec believes that's because young Canadians are asking their parents and grandparents to sign off on mortgages for them after they've been stress-tested out of the market.
The CMHC also reports that the rental vacancy rate is declining rapidly, from 3.7 per cent in 2016 to 2.4 per cent in 2018, which could be because potential home buyers are being pushed out of the market and into rentals.
There are no signs, though, of the stress test's imminent demise.
“Given the risks and vulnerabilities in the current environment,” the test is more important than ever, said an emailed statement from a spokesperson for the Office of the Superintendent of Financial Institutions, the independent agency that introduced it.
“Based on our observations … the (stress test is) having the desired effect of helping to keep Canada's financial system strong and resilient.”