B-20 might have moderated the inflamed price growth that has characterized Canada’s largest markets in the past years, but the recent slowdown should push the federal government to devise ways of encouraging would-be home buyers rather than pose the threat of penalties, according to Christopher Alexander of RE/MAX INTEGRA, Ontario-Atlantic Canada.
In his latest piece for the Financial Post, Alexander argued that far from making conditions more accommodating to consumers, the stress test has actually pushed a significant number of Canadians out of the market.
“Ten per cent of Canadians no longer qualify for a mortgage with banks. The stress test has cut first-time homebuyers out of many markets in Canada and caused a ripple effect through every tier of homebuyer. It has affected move-up buyers needing larger homes to accommodate growing families. It has created a frenzy in the rental market, since those who no longer qualify for a mortgage are opting to rent,” the executive VP and regional director wrote in his column.
Alexander added that since the market is already well on its way towards normalizing to “more reasonable levels,” the stress test has already outlived its usefulness – hence why the Liberal administration should begin considering a new approach.
“The bottom line is that the Canadian government needs to find ways to support, even incentivize, homebuyers in Canada (especially first-timers who are facing challenges entering the market) rather than penalize them.”
The government should act on these issues with the utmost urgency, Alexander stated, as the Bank of Canada has projected economic growth for this year to grow by just 2.2%, and by a smaller 1.9% in 2020, “to say nothing about the volatility created by tariffs and trade woes.”
“In other words, the context in which the stress test was introduced is no longer relevant. Interest rates aren’t anticipated to rise as originally anticipated, and homebuyers desperate to enter the market are seeking out unsecured lenders.”
The housing declines observed nationwide last month might be a disturbing indicator that the current mortgage rules are actually too heavy-handed, according to Ryerson University associate professor Murtaza Haider and real estate industry veteran Stephen Moranis.
In a recent co-written piece for the Financial Post, the pair noted that January sales numbers fell by 4% annually. This followed the already noticeable 2.4% deceleration in January 2018, and “are the first piece of evidence suggesting that housing market slowdown is deeper rooted than a direct and immediate reaction to policy interventions.”
“The January 2019 statistics offer the first opportunity to compare the annual change in housing market dynamics after the stress test came into effect,” Haider and Moranis wrote.
“The decline in last month above and beyond what was observed a year ago is indicative of the fact that the markets are not merely reacting to new regulations, but the markets have embraced a more systematic response that is characterized by fewer transactions and lower prices.”
While the government can certainly decide to maintain the current regulations and let things run their course, January 2019 sales activity should compel the federal administration to “rethink the policy interventions made in the recent past and see if there is any new evidence that warrants a change in policy.”
“Good public policy should be responsive and rooted in evidence,” the authors added. “A course correction might be a prudent way forward.”
Crucially, the recent developments will undercut much of the largest institutions’ mortgage operations – a situation that might cycle back to trigger even worse systemic vulnerabilities down the line.
“The weakness in housing markets also affects mortgage lending, a business The Big Five banks continue to dominate in Canada. The continued slowdown in housing sales may have influenced banks’ mortgage portfolios — the first signs of such an effect could soon be visible when the banks release their updated earnings report in the coming days.”