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Bridge Beat

Mar 5, 2020

Destressing the Stress Test

After refusing to tinker with the mortgage stress test, it would appear the government has relented.  The original test, brought into effect October 2017, provided evidence of mortgage ability based on their income to carry a mortgage at a rate based on the greater of the actual mortgage rate plus 2% or the Bank of Canada 5-year benchmark posted rate plus 2%, whichever is greater. 

Minister Morneau announced ​most recently March 6, 2020, the Bank of Canada 5-year benchmark posted rate would be eliminated and replaced with the weekly medium 5-year fixed insured mortgage rate from mortgage insurance applications, plus 2%.  This means that the rate will fluctuate from week-to-week based on the actual medium for 5 year insured mortgage rates.  It is expected that the current Bank of Canada rate which stands at 3.19% will be replaced by a rate that currently would be about 2.89% making the test rate 4.89%.  This represents a 0.30% drop in the interest rate and would increase mortgage amounts available to borrowers, depending on the rate that they chose for their actual mortgage. 

Some experts have indicated that the reduction  would be maybe result in a 5-7% increase for mortgage ability.  According to the CHBA, approximately 20,000 home buyers across Canada who were previously locked out could now be eligible for mortgages. 

Naysayers including a number of the economists such as Doug Porter from Bank of Montreal and Globe & Mail Business Reporter, Rob Carrick, believe that this will simply continue to heat up the market and over extend homebuyers.

What I find of interest is that the government indicated that the new test will be "more dynamic to market conditions".  Maybe so, but Minister Morneau did not address how the 2% level was achieved in the first place.  What kind of realistic or scientific test did his officials use when they came up with it in the first place?  No one has offered any explanation.  A real attempt to soften the test but still keep it effective and not overheat the market would have been to reduce the 2% level to somewhere between 1% and 1½% and look at increasing the amortization period form 25 years to 30 years.  These adjustments would allow many more potential home buyers into the market.

OSFI has also reached out to the financial industry, for comments on a further proposal to allow the change to the 5 year benchmark rate for insured mortgages apply to uninsured mortgages as well.  Hopefully, this too, will be approved and implemented later this spring 2020. 

I have mentioned this many times before, but the real problem facing Canadians is not finding artificial ways to stifle housing demand, but rather, to find ways to increase supply.  Most of these roadblocks lie with governments, municipal and provincial.  Every new provincial government makes an announcement that they are going to cut red tape and move developments through faster.  Every new mayor of Toronto says that they are going to streamline the development approval process and reduce the backlog of applications and LPAT appeals.

Sadly, over the last 15 years, since the introduction of the provincial growth plan by the Liberals in 2005/2006, the red tape and approval times approved for both the provincial and municipal levels have increased dramatically.  What this means is that it takes longer and longer to have land approved and buildings built.  The extra cost lands squarely upon the purchasers but moreover, supply is strangled at various points in the supply chain.  This is really where the governments should be looking for solutions.

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