Forthcoming changes to the Canadian Mortgage Stress Test / B-20 Regulations?

Will it be easier in 2020 to purchase a Canadian home?  Probably.

Canadian real estate industry lobbyists have been hanging around the Federal Government halls of power jonesing for Justin Trudeau to make the stress test “more dynamic”.

What is the mortgage stress test / B-20 regulations?

Basically, it’s a law that requires mortgage brokers to qualify you at a rate of 5.19% as opposed to today’s typical contract rate of around 2.74% for a 5-year fixed.  It means you qualify to purchase less house.

Why was the stress test implemented?

This policy was implemented nationwide to calm the skyrocketing Vancouver and Toronto housing markets.  As is the case with nationwide policies put in place in a very regional country, regions were affected in various ways.

What would happen if the stress test was scrapped?

According to TD Bank, scrapping the stress test completely would increase Canadian real estate sales by 8% and increase purchase prices between 4-6%.

What can people afford under different stress test scenarios?

With the stress test scrapped completely, an individual (or couple) with a $100,000 total gross income, no debt and minimum down payment (government insured) could purchase approx. $725,000.

With the current stress test qualification rate of 5.19%, this individual would only qualify for a purchase price of $550,000.

A hypothetical relaxing of the stress test could see qualifications being based on a stress test rate of perhaps 4.19%.  This would put max house purchase for the above mentioned individual at about $610,000.

Potential Mortgage Stress Test Fallout

A change or “relax” of the stress test would qualify many clients for loans and/or bigger loans.

TD estimates the stress test has calmed the market by keeping 40,000 potential buyers on the sidelines.

Overvalued Toronto and Vancouver have had their markets hit hardest by the stress test and would also see their values and sales jump the most if the test was cancelled.  Extractive industries would benefit massively; more transactions of currently inflated real estate, higher loans issued by lenders, higher prices paid by consumers.

Broader Implications of B-20

The stress test was put in place to cool the Canadian housing market.  It has served that purpose and, to this date, there has been no collapse but a general cooling of market prices.  Many realtors and industry players have been against the stress test but market cooling has allowed millenials and folks with lower incomes to buy into the market.

Now lobbyists are intent on making changes to a policy that, while arguably was too broadly applied and perhaps would have been more effective if directed to overpriced, rapidly inflating big city markets (Van and TO), has actually achieved its policy goals.

Industry, Government and Market Responsibility

An important consideration that most don’t see is the distribution of risk that happens behind the scenes in the Canadian real estate market.  Due to the availability of government backstops like mortgage default insurance, the banking industry pushes risk off of itself.

CMHC mortgage default insurance – available to individuals on purchases with less than a 20% down payment as well as lending institutions that can bulk insure large quantities of mortgages with traditional down payments – skews the dangers of a mortgage meltdown away from lenders and directly onto the shoulders of government / taxpayers / YOU.

When there are mortgage defaults in the Canadian housing market, not only can lenders foreclose on homes but are also paid back for lost interest payments, fees and other charges on insured mortgages.  The government is intertwined with the financial system.  They will sell the Canadian taxpayer short to cover the losses of a predatory industry engaged in strategic asset price inflation.

Lenders, with a relaxed or no stress test, will be able to issue more loans at higher values on increasingly inflated real estate values, making money on these transactions then passing the risk onto the Canadian Federal Government.

With record levels of Canadian mortgage and consumer debt accumulating at compound interest, I fear this policy change will bring us closer to our own Canadian version of the 2008 US Great Recession.

Confession 2 – On the other hand, I’ll be able to work with more clients and get more mortgages approved.

In this highly debt leveraged real estate environment, I hope the Federal Government knows what it is doing and isn’t taking too much input from a financial industry that has a heavy conflict of interest, profiting by indebting consumers and passing risks to government.

Because history tends to repeat itself, especially when government and its regulators are heavily captured by financial lobbyists, I think my hope is in vain.

One of my hobbies is blogging about mortgages, debt and government policy.  During the day I’m a MORTGAGE BROKER!

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