OTTAWA—A better balance between encouraging home ownership and curtailing household debt is needed in Canada, says Paul Taylor, president and CEO of Mortgage Professionals Canada (MPC).
The target of MPC’s return to the nation’s capital to meet with MPs and senators in the run-up to the federal election is the now-infamous mortgage stress test, which, it says, is punishing first-time homebuyers and the Canadian economy.
The industry group, which speaks on behalf of more than 11,500 members and over 1,000 businesses in Canada, never suggested that the stress test was the wrong idea, but that it needs to be eased.
MPC says the current stress test reduces homebuying power by 20 percent on average. For individuals, the knock-on effects of not owning a home are reduced financial stability and less development of communities, local commerce, culture, and civic life.
“We’re really concerned that if you create a generation of renters, 20 years from now those folks that were precluded to build equity in a home that they own will be a whole lot financially worse off than they otherwise would have been,” said Taylor at a press conference on May 27.
The mortgage stress test—part of what is known as the B-20 guideline—came into effect in January 2018. It requires homebuyers to qualify at the greater of the Bank of Canada’s 5-year mortgage rate or 2 percent above their contract mortgage rate.
MPC chair Michael Wolfe is asking MPs to encourage policy-makers to rework the stress test in three ways. He suggests changing the 2 percent add-on to 0.75 percent above the contract mortgage rate and removing the comparison with the Bank of Canada rate. He also recommends exempting borrowers who have met their mortgage obligations for 5 years and who want to renew with a different lender.
Finally, he advises giving qualified first-time homebuyers access to 30-year amortization periods. The current 25-year amortization period means higher monthly payments and was thought of as potentially changing in the 2019 federal budget.
“We feel some of the policies introduced were too effective and cooled borrowing activity well beyond a normal correction,” Wolfe said. “Vancouver and Toronto were arguably overheated and needed some calming. I can confirm Alberta did not.”
MPC says the mortgage stress test is decreasing competition, raising costs, and lowering accessibility for potential homebuyers.
Doing What Feds Want
The Bank of Canada supports the stress test, saying it has slowed borrowing and improved the quality of new mortgage lending by precluding highly leveraged borrowers from tacking on more debt. Canada Mortgage and Housing Corp. says there has not been significant migration of business from federally regulated banks to less strictly regulated credit unions that are not obligated to enforce the stress test.
In its April monetary policy report, the Bank of Canada suggested that the effect of the stress test would fade over time and that by 2020 the policy would no longer be dampening household spending growth. It also added that Vancouver’s stabilization could be delayed.
The problem for the federal government has always been that Canada does not have one homogenous housing market; the country is made up of many housing markets that can be reacting differently at any given time. So what measure might work for Vancouver and Toronto could have a deleterious effect on Calgary.
Taylor also says a better balance needs to be struck between federal regulation and provincial and municipal regulation. The problem for Vancouver and Toronto is the compounding effect of provincial and municipal regulations on top of federal ones.
Vancouver has a 20 percent foreign buyer tax, a 2 percent speculation and vacancy tax, and a 1 percent empty homes tax. Prices have fallen by 8.5 percent in Greater Vancouver in the last year.
No market in Canada has felt the pain of the stress test as much as Vancouver, but there are signs of nascent stabilization in home sales for Toronto’s housing markets and prices are slightly higher year-over-year, according to the Canadian Real Estate Association (CREA).
But Real Estate Board of Greater Vancouver president Phil Moore has said it’s the stress test that is the biggest reason for the local market’s decline. He has suggested using a graduated add-on to the contract mortgage rate based on the size of the downpayment, instead of the flat 2 percent.
Helping First-Time Homebuyers
Budget 2019 introduced a new measure to spur first-time homebuyers by having the government finance part of the home’s equity, thus reducing the size of the insured mortgage. MPC is skeptical of the success of the program due to its restrictions.
It doesn’t believe the Liberal government’s idea of financing a share of equity in the home will see much take-up.
The feds envision 100,000 first-time homebuyers benefiting over the next 3 years, but Taylor recalls a similar program in British Columbia that saw only 3,000 loans issued when 42,000 were expected. Taylor says the new program reduces housing options available by limiting the maximum loan value to four times a borrower’s income, whereas a couple earning $100,000 could qualify for around $470,000 in mortgage loans.
“I just don’t think those programs receive the level of success anticipated,” he said, explaining that the qualification criteria is much more restrictive.
Thus MPC believes that unless something is done to the stress test, regulations will keep preventing many Canadians from achieving their dream of home ownership.
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