Mortgage stress test accounts for up to $15B drop in new mortgages in 2018: CIBC

Increasingly unaffordable home prices and rising interest rates also played a role

An aerial view of houses in Oshawa, Ont. is shown on Saturday, Nov. 11, 2017. A new report estimates the mortgage stress test accounted for at least half of the decline in new mortgage originations last year. THE CANADIAN PRESS/Lars Hagberg

Ottawa’s new mortgage stress tests accounted for at least half of the decline in new mortgages started last year, according to a new report by CIBC that calls for the measure to be revisited amid a falling housing market.

The total value of new mortgages fell by eight per cent or $25 billion in 2018, wrote Benjamin Tal, deputy chief economist at CIBC World Markets Inc. in a report released Tuesday.

READ MORE: B.C. real estate board urges feds to revisit mortgage stress test

He estimates the impact of the new stress test made up $13 billion to $15 billion, or 50 to 60 per cent, of that drop. The other 40 to 50 per cent of the drop comes from increasingly unaffordable home prices and rising interest rates, he said.

Home sales have continued to fall in Canada since a slew of new federal and provincial government measures was introduced. The Canadian Real Estate Association released figures Monday showing home sales in March fell to their lowest level for the month since 2013. Sales through the Multiple Listing Service fell 4.6 per cent compared with a year ago, while the average sale price fell 1.8 per cent on a year-over-year basis to $481,745.

“I think that B-20 was necessary in order to save … some borrowers from themselves,” said Tal in an interview, referencing the official name for the test. It came into effect last year and requires homebuyers to prove that they can service an uninsured mortgage at a higher rate than they qualify for in order to receive a loan from a federally regulated lender.

“However, I think that it has to be a little bit more flexible, more dynamic,” he said.

He argues it does not take into account rising interest rates and said that since the test’s introduction, the Bank of Canada raised its benchmark rate by 75 basis points.

“It’s much more severe now than it was when it was introduced,” Tal said.

The test doesn’t consider where we are in the cycle, he said, and what the likelihood is of rates rising 200 basis points — the amount plus the qualifying mortgage rate that uninsured borrowers must prove they could service their mortgage at.

The test also doesn’t take into account that borrowers’ incomes are likely to rise throughout their mortgage term, that borrowers who take on longer mortgage terms decrease risk and that borrowers pay back a significant amount of their outstanding principal over the term.

Lastly, the B-20 contributes to a rise in alternative lending, the report found, which transfers risk from a regulated to a less-regulated segment of the lending market.

Alternative lenders accounted for nearly 12 per cent of the total number of transactions in Ontario in 2018, according to the report. That’s up from close to 10 per cent in 2017 or a roughly two per cent rise since B-20 came into effect.

Just over half of those lenders are individuals, according to the report, with institutional ones, like mortgage investment corporations, making up the remainder. The report estimates 10 per cent of the private lenders are family members.

“Alternative lending, even individual lending, is part of any normally functioning mortgage market,” Tal said. “But a fast-growing alternative lending segment of the market is not part of a normally functioning market.”

If it rises to a big enough number to become a macro story, like 15 per cent, he said, then it can make a difference for the mortgage market and economy as a whole.

Tal suggests rethinking how the test is structured and making it more flexible. That could mean establishing a floor, like four-and-a-half per cent, that you have to qualify at even if mortgage rates fall below it, for example, or using a figure smaller than 200 basis points, like 100, at certain points in the cycle, he said.

“I don’t have all the answers. I’m just suggesting directions to think about.”

Aleksandra Sagan, The Canadian Press

Like us on Facebook and follow us on Twitter

Just Posted

Rossland Legion supports youth activities

Legion members donate to Canadian Tire Jumpstart Program

Trail Sk8 Park Celebration

The all-wheel park is in a scenic location near the Gyro Park boat launch

Trail Major All Stars poised for provincial little league championship

Trail Major All Stars open BC Little League championships against Coquitlam in Vancouver on Saturday

Market and music tonight at Gyro Park

Grapevine: Local events from July 18 to July 24

Fort Shepherd restrictions unchanged after public meeting

TLC held an informational session in Trail on Monday

Feds lowered poverty line, reducing the number of seniors in need: documents

Liberals introduced a poverty line that was below the prior low-income cutoff

Justin Trudeau’s carbon footprint revealed in ranking of world leaders

Travel company ranks 15 world leaders’ foreign flight CO2 emissions

“Does Kirby care?” B.C. First Nation’s group using geo-targeted ads in Houston, Texas for justice

The Heiltsuk Tribal Council has called out Kirby Corporation for the Nathan E. Stewart oil spill

Trudeau announces $79M investment for 118 more public transit buses across B.C.

Contributions from municipal to federal level to fund more buses in a bid to cut commutes

B.C. woman wins record $2.1 million on casino slot machine

‘That night was so surreal … I wasn’t able to sleep or eat for the first two days,’ she said

West Kootenay U16 Rebels take home provincial gold

West Kootenay Rebels fastball team battle hard to win the BC U16C Fastball Championship

After B.C. dad’s death, Technical Safety BC wants changes to trampoline park rules

Jay Greenwood, 46, did ‘a series of acrobatic manoeuvres prior to a fall that caused serious injury and cardiac arrest’

$900M settlement reached in class action on sexual misconduct in Canadian military

After facing criticism, the government moved to begin settlement proceedings in early 2018

Tax take stays ahead of increased B.C. government spending

Tax revenue $2.1 billion higher than budget in 2018-19

Most Read