Is it true that the mortgage stress test doesn’t really have unintended consequences? That’s what Evan Siddall, the president and CEO of Canada Mortgage and Housing Corporation, believes.
In an open letter to the Standing Committee on Finance, Siddall wrote, “These policies have been wrongly accused of having ‘unintended consequences.’ Public servants spend a great deal of time evaluating consequences and how behaviours might change as a result of policies in normal times and in times of financial instability — a state that is too often ignored.”
A few of the unintended consequences the real estate industry have blamed on the stress test include lower supply, a tighter rental market, and increased activity with unregulated lenders.
Siddall says the “real culprit” is high house prices. According to a recent report by the CMHC, gross household debt hit 178% of disposable income at the end of 2018. Siddall accurately points out that debt is a claim on future income. When the stress test was implemented at the beginning of 2018, house price growth did moderate, so there’s a chance that if the stress test regulation didn’t kick in, then household debt would be even higher.
“If I can borrow an analogy from my colleague, OSFI Superintendent Jeremy Rudin: having braked hard enough to stop your car from barreling down a hill, you don’t declare victory and release the brakes,” Siddall wrote.
That’s Siddall’s response to real estate industry members calling for a removal or altering of the stress test. “The stress test is doing what it is supposed to do,” he continued. “Please look past the plain self-interest of the CHBA, MPC and OREA and see house price moderation as helpful: an intended consequence. Choose instead to heed the consistent views of those of us who are unconflicted: the Department of Finance, OSFI, the Bank of Canada, the IMF — again just this week, and CMHC.” Last week, the IMF stated that Canada should actually hold off on attempting to make housing more affordable.
With first-time buyers bearing most of the weight of the stress test, Siddall references the First-Time Home Buyers Incentive, which is designed to help qualified first-timers come up with a larger down payment through a shared equity mortgage with CMHC.
In the eyes of people trying to buy and sell homes, the stress test is a burden. To CMHC and those who are “unconflicted,” the stress test is working just fine. So, at the moment, if the stress test is the thing preventing you from qualifying for the home you want, it’s because you can not afford that home.