Study finds that Stress test responsible for drop of as much as $15-billion in new mortgages.

The federal government’s new mortgage stress test was responsible for a drop of approximately $15-billion in residential mortgage borrowing last year according to a report released recently. The rule change in 2018 was the biggest factor in the 8% drop in new mortgage originations in Canada year over 2017, about nearly a $25 billion decline in lending activity, argues Benjamin Tal, Deputy chief economist at CIBC World Markets Inc.

The stress test accounted for 50-60% of the decline, or nearly $15 billion. The other factors were lack of affordability in major markets and rising interest rates. Nearly 93% of the fall lending activity was due to fewer borrowers taking out a loan, the remaining 7% was due to people borrowing less because they could not qualify for larger loans due to the new rules. The stress test required borrowers to prove that they could still be able to make their monthly mortgage payments even if interest rates were a couple percentage points higher than the rate they negotiated with their lenders. Home sales fell by 11% last year, with the Vancouver region leading the drop with 32%. The new stress test was blamed by many experts which left many buyers unable to qualify for a mortgage.

The market weakness continued in 2019 with national home sales in March dropping nearly 4.6% compared with the same period last year, according to a report from Canadian Real Estate Association (CREA). Sales in March have been the lowest since 2013 as many buyers remained on the sideline because of the stress test rule. The number of homes sold in Vancouver in March was down 34% compared to a year ago. The need of a stress test has worked as intended to slow the rate of higher-risk borrowing, especially in expensive markets such as Vancouver. However, it may be time to consider relaxing the criteria as it is a bit too severe at this point.

There was a growth of private lending last year, as many borrowers turned to lenders who were not subject to the stress test rule. More than half of all private loans were accounted by individual lenders. Institutional mortgage investment corporations (MICs) accounted for the rest. The alternative lending market has been growing at a worrying rate in the wake of the stress test.

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Source: Globe and Mail