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

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

Province looking at steps to dissolve Jumbo resort municipality

Disincorporating municipality will likely require a legislative change, according to the province

Coldest Night of the Year returns to Cranbrook in February

Canadian Mental Health Association Kootenays plans to raise $20K

Almost 20,000 parking tickets issued by Interior Health at hospitals in 2019

In 2018, pay parking in Interior Health hospitals totalled $5.3 million of their $2.2-billion budget

New autonomous technology program debuting at College of the Rockies

The College of the Rockies is launching a new two-year Autonomous Systems… Continue reading

City to co-host climate info session in February

City, environmental organizations invite public for discussions on climate change and action

Four things ‘not’ to do if you run into Prince Harry and Meghan in B.C.

Here is a list of some things you definitely should NOT do, according to the BBC

B.C.-based Coulson Aviation C-130 crashes in Australia

Three people are confirmed dead in the crash in New South Wales

Veteran B.C. journalist battles cancer through pioneering immunotherapy treatment

Vancouver Island rallies around JR Rardon and family during stay in Seattle

New nasal spray launched in Canada to combat hypoglycemic shock in diabetics

Baqsimi is a nasal spray contains three milligrams of glucagon

Prices for recreational marijuana in B.C. down from a year ago

New inflation figures show gasoline, housing and certain kinds of food cost more

B.C. RCMP spent roughly $750K on massive manhunt for Port Alberni men

Manitoba RCMP helped with 17-day search through the province’s northern terrain

Future space homes could be made of mushrooms

NASA explores use of fungi to build structures in space

Man killed by police in Lytton called 911, asking to be shot: RCMP

Howard Schantz, also known as Barry Schantz was killed following a standoff at his Lytton home

Most Read