Responding to a barrage of criticism from the real estate industry, Canada Mortgage and Housing Corp. (CMHC) president and CEO Evan Siddall told a government finance committee that the current mortgage stress test must remain in place “to protect our economy from potentially tragic consequences.”
Siddall says the stress test, which requires home buyers who are applying for a new mortgage to qualify at two percentage points higher than the actual contracted rate, is doing its job. The measure was introduced to slow down the housing market and discourage Canadians from taking on too much debt.
“The potential consequences of our debt-fuelled real estate boom in Canada are serious,” wrote Siddall in a letter to the committee. “While I’m not predicting it, it nonetheless could happen here: of the 46 banking crises for which we have housing data, over two-thirds were preceded by real estate boom and bust cycles. Moreover, we must avoid policies that serve only to enrich the people who have already made tax-free gains on real estate; rather, we need to be deliberate to avoid further inflating house prices.”
CMHC says that since stress test requirements were introduced, house prices have been reduced nationally by 3.4 per cent versus where they otherwise would have been. Industry groups say the one-size-fits-all policy has been working to cool overheated markets in major cities but has hurt buyers in smaller centres where markets were already slow.
“The Canadian Home Builders’ Association, the Mortgage Professionals Association of Canada (MPC) and the Ontario Real Estate Association have all called on the government to ease the stress test and restore 30-year mortgage amortizations,” wrote Siddall. “Either of these would have added to housing demand across the board (not just targeted to a small segment) and price inflation of as much as one to two per cent in our large cities.”
He said Paul Taylor, MPC CEO was bold enough to tell the committee “that we should actually encourage people to borrow 4.8 times incomeÖ. Apparently, the MPC is content to see home builders, real estate agents and mortgage brokers receive short-term benefits while Canadians bear the long-term costs.
“My job is to advise you against this reckless myopia and protect our economy from potentially tragic consequences.”
Siddall also took aim at a couple of reports issued by major banks, which called for a reassessment of the stress test. “Since a federal government’s guarantee stands behind lenders’ insured mortgages, these appear to be cases of evident moral hazard,” wrote Siddall. “I doubt they’d be as cavalier if it were their risk.”
MPC fired back with a new report that says nobody was suggesting that the stress test should be eliminated, but that “there are many voices saying that there is a need for adjustments to the policies.”
The report, by economist Will Dunning, says, “By pretending that the criticisms are about a binary choice (stress test versus no stress test) the government and its representatives are refusing to discuss the real concerns that exist, and therefore, the real (and still emerging) problems are not getting addressed.”
MPC says the current policies are “blunt instruments that are causing undue pressure to several regional economies across Canada, and as a result, the economy as a whole. They are also directly impacting the prospects for first-time buyers and others looking to enter the housing market and build equity. Left unchecked, the current framework could contribute significantly to the development of recessions in some economic regions.”
MPC says the stress test does not consider the income growth that borrowers will have over the term of the mortgage. It suggests a stress test of 0.75 percentage points would make more sense.
Dunning’s report says the stress tests are now also impacting new home starts and renovations, which have dropped sharply.
“Each housing start that is lost has an economic impact that is 10 times greater than for each lost resale transaction,” Dunning says. “The adjustments for new construction occur quite gradually. The economic impacts have barely begun, will develop slowly and won’t be fully experienced until the second half of 2021.”
But Siddall says claims that the policy has had “unintended consequences” in regional markets overlooks the fact that “underwriting standards must apply in both good times and bad.”
He says, “Critics of the stress test ignore the fact that high house prices are the overwhelming reason why home ownership is out of reach. There are many economic and other factors behind this.” He urged the finance committee to “look past the plain self-interest of the CHBA, MPC and OREA and see house price moderation as helpful: an intended consequence.”
Dunning says, “Yes, builders, real estate professionals and lenders have stakes in the outcomes. That doesn’t mean that they are automatically wrong or that they should be distrusted or ignored. They might be providing useful information and their comments might be well-intentioned.
“The government’s representatives are also a ‘special interest’. They have very large personal stakes in how their actions are viewed and the effects on their own careers.”
