While the mortgage stress test remains a hot topic, nearly two years after its implementation, there’s something else mortgage related that I feel is worth discussing. The gig economy is changing the way people make money, and mortgage lending practices should modernize to accommodate it.
The Canadian Real Estate Association launched REALideas recently in anticipation of the federal election. One of the points they made is that mortgage lending needs to be updated to better serve those participating in the gig economy. This is a great point and I don’t think it’s getting enough attention.
The gig economy is a market system where job positions are often short-term, temporary, or on a freelance basis. A company may have a large project, so they hire a few short-term contractors for the duration of the project, but after, all parties go their separate ways.
For example, an animation studio will take on a project, say a movie, and they will hire enough animators to get the job done by the deadline. When that project wraps, they don’t need those animators anymore.
I’ve seen this in the ad agency world, too. Many agencies in the new home industry don’t even have creative teams - they just get the account and then build the creative team based on freelancers and short-term contracts.
As a business owner, I understand this strategy and have used it many times over the years. I’ve had designers work on projects for me, writers come up with content, and while they were working on stuff for me, they were also working on many other projects for their other clients.
The problem with being a freelancer or working on a short-term contract is that major lenders like banks see you as untrustworthy. The bank wants to see steady income. If you have a salary and work for someone else, the bank just wants to see a couple recent pay stubs and you’re basically good to go. If you are self-employed or you’re working on a contract that’s less than a year, then get ready to provide years of financial statements to prove you can afford a mortgage.
As young home buyers embrace the gig economy, mortgage lenders should be figuring out proper ways to qualify these types of applicants. I can see both millennials and Generation Z supporting the gig economy, so if buying a home is to be possible for them, lenders need to get with the times.
All that said, I have no recommended solution, and neither does the CREA. According to the REALideas Hub, “CREA recommends federally regulated lenders be encouraged to accommodate the growing number of Canadian gig workers seeking to enter the housing market. Rules governing income verification and reasonability of income must continue to adapt to changing trends of employment.”
But there’s no mention of how income verification methods should adapt. I’m hoping now that more people are starting to talk about the gig economy's impact on the housing market, someone will come up with a solution. Maybe a millennial will figure it out.