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

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

A nurse performs a test on a patient at a drive-in COVID-19 clinic in Montreal, on Wednesday, October 21, 2020. THE CANADIAN PRESS/Paul Chiasson
36 new cases of COVID-19, one death in Interior Health

The number of active cases in the region is at 366

The KLO Community Policing Office is located within the Regional District of Central Okanagan building on KLO Road. (File)
Kelowna council to consider closure of KLO Community Policing Office

Since May 2020, the office has been effectively closed, with duties absorbed into the Kelowna Police Services Building

A Kelowna Chamber of Commerce event in 2017. (Contributed)
Kelowna Chamber announces new board of directors

Directors will be ratified at the annual general meeting on March 23

Mussel inspection sit set up at B.C.-Alberta border. (Contributed)
Okanagan Basin Water Board calls for stronger invasive mussel protection

Letter sets out six recommendations for environment minister George Heyman to consider

(BCCDC)
42 cases of COVID-19 in the Central Okanagan last week

Officials have identified almost 3,000 cases of the virus in the Central Okanagan throughout the pandemic

B.C. Health Minister Adrian Dix and provincial health officer Dr. Bonnie Henry head for the B.C. legislature press theatre to give a daily update on the COVID-19 pandemic, April 6, 2020. (B.C. government)
B.C. nears 300,000 COVID-19 vaccinations, essential workers next

564 new cases, four deaths, no new outbreaks Thursday

Thomas Kruger-Allen is expected to be sentenced Friday, March 5, 2021.
Sentencing expected Friday for 2019 Penticton beach attack

Defense wants 12 to 18 months for beach assaults that left one of his victims with brain injury

Municipal Affairs Minister Josie Osborne speaks in the B.C. legislature, March 4, 2021. (Hansard TV)
B.C. Liberals, NDP sing in harmony on local election reforms

Bill regulates paid canvassers, allows people in condo buildings

(National Emergency Management Agency)
No tsunami risk to B.C. from powerful New Zealand earthquake: officials

An 8.1 magnitude earthquake shook the north of New Zealand Thursday morning

(AP Photo/Richard Vogel, File)
Pandemic stress, isolation key factors as to why Canadians turned to cannabis, alcohol

Study found that isolation played key role in Canadians’ substance use

Cannabis bought in British Columbia (Ashley Wadhwani/Black Press Media)
Is it time to start thinking about greener ways to package cannabis?

Packaging suppliers are still figuring eco-friendly and affordable packaging options that fit the mandates of Cannabis Regulations

A herd of turkeys caused a traffic jam in Armstrong March 3. (Video still)
Turkeys talk back at traffic in Spallumcheen

VIDEO: ‘Bossy little buggers refused to move’

(File photo)
Kamloops Mountie bitten while arresting woman

The assault on March 1 is the latest in a string of incidents that have left local officers injured

Most Read