Alberta Election Fact Check: Time to end the mortgage stress test?
|globalnews.ca 15 Mar 2019 at 17:39|
A year after the so-called mortgage stress test came into effect, the mortgage underwriting guidelines are being targeted by Conservative politicians ahead of a provincial and general election.
Alberta United Conservative Party Leader Jason Kenney, a speaker at the Calgary Real Estate Board on Jan. 30, said the mortgage stress test was punitive to prospective Alberta homeowners and out of touch with housing markets in the province.
“One of the reasons why homes are less affordable in Alberta today is because of unfair rules imposed by Ottawa to deal with the overheated real estate markets in Toronto and Vancouver,” Kenney said.
“The so-called ‘stress test’ imposed by the CMHC (Canadian Mortgage and Housing Corporation) has put tens of thousands of Albertans out of reach of home ownership, diminishing the value of the homes they can buy, to deal with the real estate market in Toronto and Vancouver.”
Kenney went on to say that the mortgage stress test came into effect in January 2018, in the middle of Alberta’s post-oil price shock-fueled recession.
“We did not have the risk of overheating nationally. They did have the risk of overheating in Toronto and Vancouver. They took out a bazooka rather than a fly swatter to take care of the problem.”
Calgary-Shepard Conservative MP Tom Kmiec also took aim at the stress test in a House of Commons debate on affordable housing on Jan. 31, calling the CMHC regulations “a one-size-fits-all tool that punishes Canadians from coast to coast to coast, regardless of the prices in their local markets.”
Kenney and Kmiec purport that the mortgage stress test is unfair to Albertans and punishes them for overheating housing markets in Toronto and Vancouver. They also say the stress test has put “tens of thousands of Albertans out of reach of home ownership.”
They call for the mortgage stress test to be scrapped in Alberta.
The stress test is applicable to all prospective home buyers with a less-than-20 per cent down payment — the buyers who require mortgage insurance offered by CMHC and two private insurers.
Those home buyers are evaluated on whether they could pay their mortgage if interest rates went up by two per cent above their current rate. The interest rate rise also serves as a proxy to other financial stresses a household might face, like a job loss or a reduction in income.
The stress test was passed along to Canada’s federally-regulated financial institutions in guideline B-20, “ Residential Mortgage Underwriting Practices and Procedures ,” from the Office of the Superintendent of Financial Institutions (OSFI). It is the latest in a series of mechanisms designed to stabilize house prices across Canada.
“The federal government and CMHC were looking at things like price-to-income ratios and price-to-rent ratios and noted that, globally, Canada is at the top end of those ratios,” said David Dale-Johnson, the Stan Melton Chair in Real Estate at the University of Alberta School of Business.
“In other words, housing prices here are pretty high relative to most other places around the world. Their concern is that Canadians are overextended with respect to their purchases of housing.”
While the CMHC’s mission stated on its website is “to make housing affordable for everyone in Canada,” housing prices were running away from being affordable in cities other than Toronto and Vancouver, with areas like Ontario’s Golden Horseshoe, Victoria and the greater Lower Mainland who were getting most of that overheating in 2017.
The size of the Toronto and Vancouver markets in proportion to the national housing market gave good reason for regulatory intervention, especially in the event houses in the 416 and 604 area codes experience a downturn.
“When you have Toronto and Vancouver representing more than half of home resales across Canada, they do register at the national level,” Dale-Johnson said. “You have to pay attention to what’s going on and, if it’s overheating, the risk of the market turning down with the potential of a brutal decline that could disrupt the market with a significant price decline — just for the sake of the stability of the market — it did make sense.”
“If we go back a couple of years prior to the oil price shock, there were some worries in Edmonton and Calgary,” Dale-Johnson added.
Before the stress test, insured mortgage eligibility requirements changed to include an increase in the minimum credit score, reducing the amortization period to 25 years from 30, limiting the home price tag mortgage insurance would cover, among others.
Vancouver introduced a one per cent empty homes tax in November 2016 and the Ontario government announced its Fair Housing Plan in April 2017, which included a foreign buyers tax and expanded rent controls.
In addition to stabilizing housing prices, the B-20 guideline is designed to reduce the number of Canadians with high mortgage debts.
“They are particularly focused on reducing the share of borrowers who are highly-indebted, so those borrowers who are seeking high loan-to-value mortgages,” CMHC senior analyst James Cuddy said.
“And there’s evidence to show that the share of mortgages going toward highly-indebted individuals is declining in Calgary and Edmonton.”
This probably a good thing, according to RBC senior economist Robert Hogue.
“Household debt has been identified by the Bank of Canada and many of us in the private sector as a key vulnerability to the health of the economy.
“High household debt may exacerbate the outcome” of the next downturn in the economy, Hogue said, adding the prudent course of action is to keep focusing on debt.
Nationwide, Canadians have a debt-to-income ratio of 179 per cent to start 2019. Put another way, on average, for every dollar a Canadian earns, she or he owes $1.79. That’s the highest it’s been since records began in 1990.
According to an RBC economics report published in April 2018, Albertans’ total debts rose from $164,000 per household in 2010 to $192,000 in 2016, the highest of the 10 provinces. As of 2016, RBC says Alberta’s households spend 15.2 per cent of their disposable income servicing debt.