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

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.

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.”

Follow ↕AleksSagan on Twitter.

Companies in this story: (TSX:CM)

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

Just Posted

Kenney pledges $100M toward Red Deer hospital improvements

Premier Jason Kenney has committed $100 million toward improvements at Red Deer… Continue reading

RDC athlete apologizes for racist slur

A Red Deer College athlete has apologized for using a racial slur… Continue reading

Innisfail man killed in single-vehicle collision

RCMP said car hit a pole just northwest of Innisfail early on Wednesday

Sylvan Lake senior injured when ambulance gurney flips at Red Deer hospital

A Sylvan Lake senior suffered a number of injuries on her way… Continue reading

VIDEO: Grumpy sea lion resists help back to water in Washington state

Crews were able to coax her into a crate to carry her back to water

Your community calendar

Feb. 19 A Liberation of Holland event is being held at the… Continue reading

David Marsden: Finally, a healthy prognosis for our hospital

The announcement of $100 million toward improvements to Red Deer Regional Hospital… Continue reading

Police intervention in Kahnawake would be act of provocation, First Nation says

Protesters reinforced a rail blockade on the Kahnawake Mohawk territory south of… Continue reading

Alberta must juggle sluggish economy, big deficits, lost jobs in upcoming budget

EDMONTON — Alberta is to bring in its new budget Thursday while… Continue reading

Prepare for new coronavirus like an emergency, health minister advises

OTTAWA — Health Minister Patty Hajdu is encouraging Canadians to stockpile food… Continue reading

New Brunswick maintains position on abortions and Canada Health Act

FREDERICTON — The New Brunswick government is standing firm in its position… Continue reading

Bolder actions, words from protesters behind Quebec and Ontario rail blockades

Protesters behind rail blockades in Quebec and Ontario ramped up their actions… Continue reading

Most Read