Mortgage Stress Test is Creating a Generation of Renters

Since the new mortgage stress test was implemented at the beginning of the year, approximately 18 per cent of prospective homebuyers have been unable to buy their preferred home, according to a report from Mortgage Professionals Canada (MPC).

“I think there’s no question that there’s a significant number of folks who have been disqualified from purchasing a home,” Paul Taylor, president and CEO of Mortgage Professionals Canada said. “The stress test effectively reduces everybody’s borrowing ability. It also stifled an awful lot of what would be sort of move-up buyers.”

First introduced in 2016 for insured mortgages, this new stress test requires all uninsured mortgage borrowers to qualify against the Bank of Canada’s five-year benchmark rate, or at their contract rate plus an additional two per cent.

This has caused home sales to fall across Canada, as consumers wait to see the impact of the stress test and increasing interest rates. If home sales continue to slow, eroding prices will cause consumers to pull back on consumer spending, potentially leading to a dangerous scenario for the overall economy.

“When [their home] starts to be worthless people start to be concerned about their economic future. They stop spending, they start saving more, they don’t go out on the weekends. And so that has an economic knock on consequences for local restaurants and other service providers,” MPC Taylor says.

“We just think that that two per cent rate at the moment is too high. It doesn’t take into account expected increases in people’s incomes over time. It doesn’t seem to take into account the fact that five years in you’ll have down paid quite a lot of equity in your home and so your debt outstanding is actually going to be reduced,” says Taylor.

What this has also led to, according to a new report from Mortgage Professionals Canada, is that homebuyers unable to purchase a home are becoming a permanent generation of middle-class renters.

“Current policies that create a permanent generation of middle-class renters could increase wealth inequality as the ability to own homes and generate long-term equity becomes more and more difficult,” Mortgage Professionals Canada said in a release.

“This is one of the greatest economic risks facing Canada – that local economic weakness combined with the deliberate suppression of housing demand via the mortgage stress tests could result – unnecessarily – in falling house prices in some areas of the country,” the report said.

The Bank of Canada said in its Financial System Review that stricter mortgage rules have helped ease elevated consumer debt and slow price gains for single-family homes in Vancouver and Toronto.

"The vulnerability related to high household indebtedness has begun to ease. Incomes continue to rise and household credit growth has slowed due to higher interest rates and policy measures aimed at mortgage financing and housing," the central bank said in a statement in June. "Because of the sheer size of the stock of debt, however, this vulnerability will persist for some time."

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