3 reasons why the mortgage stress test should not change (for now)

The mortgage stress test has been a hot topic since it was first introduced in 2018. Some in the real estate industry believe the policy has done its job and it’s time to revise it, and some believe it should remain the way it is. 

Those looking to loosen the mortgage stress test include real estate organizations like the Toronto Real Estate Board, the Ontario Real Estate Association, and the Building Industry and Land Development Association. And for good reason, they all want it to be easier for people to buy homes. 

On the other side of the debate, fighting to keep the stress test in its current form, there are organizations like the International Monetary Fund and the Canada Mortgage and Housing Corporation. 

Now, the Centre for Urban Research and Land Development has thrown its opinion into the ring. CUR recently shared three reasons why the mortgage stress test should not be changed:

#1: Risk of overheating 

The mortgage stress test was designed to prevent Canadians from taking on too much debt and risk in an overheated market. CUR found that resale activity in the Greater Toronto Activity fell 19% in the last six quarters compared to levels hit in 2018, and is now closer to the 20-year long term average. 

The market slowed down, but the prices are still high. The stress test didn’t really have a strong impact on prices. In fact, the average MLS price increased 2% from December 2018 to June 2019. 

Slowed price growth is welcomed though by aging millennials looking for more space. There’s pent up demand in the GTA, and with the population increasing by more than 100,000 a year, the demand will remain strong. CUR warns that loosening the stress test now would just fuel demand and could cause the market to overheat again. 

#2: Market reaction is temporary 

When the federal government introduces new regulations, the housing market is often impacted before the policy even kicks into action. CUR found that new regulations lead to two to three quarters of slower activity, but then activity picks up again. Some people like to step onto the sidelines just to see how the market reacts to the new policy, which is also a reaction that affects the market.

The stress test slowed activity, prevented some people from taking on too much debt, home prices still increased slightly, and activity returned to the long-term average. According to CUR, loosening the stress test at a time like this would undo all the good it’s done.   

#3: Low delinquency rates aren’t what they seem

Yes, mortgage delinquency rates are low, especially in Ontario, but that doesn’t mean the stress test should be loosened. CUR points out that delinquency rates haven’t been this low since the 1990s, but if you remember correctly, the market crashed, unemployment increased, and delinquency rates went up. And since many homeowners are currently on the edge of affording their payments, if interest rates were to suddenly spike, an extra hundred dollars or so could be enough to push delinquency rates up.

Basically, Canada’s housing market was overheated and the stress test did its job bringing it down for a soft landing. So, the debate about the stress test is actually about whether or not the market is stable enough to handle even stronger demand. CUR says no. What do you think?