The Stress Test Controversy Continues to Boil: CMHC Head Continues to Defend the Tough Lending Rules

Wednesday, June 19, 2019 

Two weeks ago, CMHC CEO, Evan Siddall took an aggressive and in the view of this writer, inflammatory position in his letter to the House of Commons, Finance Committee, defending the elevated mortgage stress test and mortgage lending rules implemented effective January 1, 2018.  These rules reduced the maximum amortization period for blended payment mortgages down to 25 years from 30 years (and previously reduced from 35 years).  Probably more devastating was the imposition of the stress test that required borrowers to demonstrate income capacity to carry a mortgage not only at the current rates but at a rate 2% above the 5 year BOC rate.  These two stringent requirements have by many measures, effectively cut out 10-15% of potential borrowers and purchasers and put a severe damper on new home sales and resales. 

I cannot argue with the desire of CMHC and the government to address the alarming price escalations and high debt levels.  However, the major sources of these problems were Toronto and Vancouver.  By imposing a national solution, the government effectively made everyone across Canada pay for the frothiness of the two major markets.

In Siddall's original letter to the House of Commons, Financing Committee, the CMHC CEO compared current debt and housing price levels to the tulip bulb crisis in the Netherlands in the 17^th century, the stock market bubble of the 1920's, and the collapse of the real estate bubble in the U.S. in 2009.

With all due respect, the CEO of the CMHC has no business fear mongering and predicting financial Armageddon if the very stringent rules that they imposed 2 years ago are somewhat relaxed to allow first-time buyers back into the marketplace.  In my view, it is irresponsible for the CEO to speak in those dramatic terms.  He provides no data or specific evidence that a relaxation of the new rules will bring back the rampant speculation and excessive prices of 2016-2017.  His statements are purely opinions and no fact based.

Even more disturbing is the position he took back in May 2019 and as recently as Monday, June 10, 2019, at a panel hosted by the Global Risk Institute that banks, mortgage and real estate brokers and builders are merely seeking to enhance their lucrative business portfolios by loosening the stress test and exposing the economy to a potential meltdown if prices are allowed to continue to escalate and debt levels allowed to grow.  He takes issue with the position of the CIBC Chief Economist, Benjamin Tal, and as well as another senior economist from the TD Bank, both of which have suggested that loosening the mortgage stress test rules would not bring financial Armageddon but will allow a large component of the first-time buyer market back into the marketplace.  In addition, Siddall summarily dismissed the devastating impacts on the residential construction industry over the last 2 years with an almost virtual halt of sales in the low-rise side in the GTA and on both fronts in the GVA.  When asked by Tal what the justification was for the 2% level on the stress test and was there any scientific analysis that was used to arrive at that level, Siddall suggested that for the politicians, simplicity was the key and that to change the metrics, you had to "convince the Minister of Finance and his Cabinet colleagues".

The reality is that the GVA and GTA were already in a major slide since the summer of 2016 for GVA and April/May 2017 for the GTA when this test was imposed.

Clearly, the government has to tread carefully with balancing and maintaining one of the most important drivers of the Canadian economy, being the residential construction industry, whilst maintaining and limiting the frothiness of certain markets like Toronto and Vancouver and managing debt levels.  However, there needs to be sensitivity to the major role residential construction plays in driving the Canadian economy.  If you kill the golden goose, who will lay the golden eggs?

It would appear that nothing but a total recession caused by the major slowdown in the residential construction industry, would awaken the government to the fact that maybe it is time to loosen the rules.  For instance, simply allowing the amortization period to return to 30 years would allow many more purchasers back into the marketplace.  Yes, it would extend debt levels modestly but it would make a big difference to affordability and it should not materially impact on the price of real estate tulips.