A new report authored by Mortgage Professionals Canada (MPC) Chief Economist Will Dunning conducts a deep dive on the impacts of the recent introduction of a stress test on both insured and uninsured mortgages in Canada. The report, entitled The False Binary, notes that commentary from government officials is often about whether there should be stress testing at all. In fact, there are no serious voices calling for the elimination of the stress tests, and there are many voices saying that there is a need for adjustments to the policies. This report is a plea to the federal government to engage in discussion about the defects within the policies and to consider changes that will limit the worst consequences.
The report outlines how the current stress tests have contributed to a sharp decline in housing activity in Canada. Impacts within resale markets have gotten considerable attention. But, even more importantly, construction of new homes and home renovations are now in the process of turning sharply downwards.
“Each housing start that is lost has an economic impact that is 10 times greater than for each lost resale transaction”, explained Mr. Dunning. “The adjustments for new construction occur quite gradually. The economic impacts have barely begun, will develop slowly, and won’t be fully experienced until the second half of 2021.”
The current stress tests are blunt instruments that are causing undue pressure to several regional economies across Canada, and as a result the economy as a whole. They are also directly impacting the prospects for first time home buyers and others looking to enter the housing market and build equity.
Left unchecked, the current framework could contribute significantly to the development of recessions in some economic regions.
“For some time, our association and others have emphasized that the major defect within the stress tests is that they fail to consider the income growth that will be experienced by the mortgage borrowers,” said Paul Taylor, President and CEO of Mortgage Professionals Canada. “At 2 percentage points above the actual contracted rates, the stress tests on insured and uninsured mortgages are causing serious and undue negative impacts to the Canadian economy and to the housing market. We advocate for prudent amendments to the current framework. This includes a stress test of 0.75 percentage points to account for higher income and reduced mortgage principal.”