The tightening of Canada’s mortgage rules is seeing a large segment of wannabe homebuyers shut out of the market as they are unable to meet the new requirements. Now the mortgage industry is warning that the federal regulators’ new mortgage stress test is responsible for this year’s housing market slowdown, estimating that the reduced real estate activity will mean Canada will create 200,000 fewer jobs over the next three years. This report was recently released by Mortgage Professionals Canada. Not only are they feeling sorry for the young Canadians hoping to buy a home, they are also worried about the economic impact.
About 18 per cent of prospective homebuyers in Canada would fail the stress test on their desired home, the report found, that doesn’t mean they can’t buy a home, but they would have to settle for something a little more modest. On average, these buyers will now be short nearly $29,000 for their purchase, economist Will Dunning estimated in the report.
In the view of many in the industry, the stress tests — which require borrowers to qualify at a rate that’s some two percentage points higher than what’s being offered on five-year fixed mortgages — are excessive. Mortgage Professionals Canada is suggesting Canada’s banking regulator reduce the test to 0.75 percentage points above offered rates.
But the group’s report goes further than that. It suggests that the tougher new federal regulations risk creating “a permanent generation of middle-class renters … as the ability to own homes and generate long-term equity becomes more and more difficult.”
“More and more young people are getting used to the idea that they may never own a home and become permanent renters.”
What’s more, it sees the growing phenomenon of buyers taking money from “the bank of mom and dad” as a bad sign for the future of home ownership.
“This means that there will be ‘rationing’ in the housing market,” Mortgage Professionals said in a press release. “The ability to purchase will be increasingly determined by the buyers’ opportunities to get help from parents.
The report may have a point there. But the mortgage industry is pointing the finger of blame at the wrong target. It’s years of eroding affordability, not mortgage stress tests, that created this problem. So really the issue is the staggering rise in the cost of owning a home and regardless of how stringent the mortgage test is, there will be a growing number of Canadians unable to own a home even if the mortgage stress test is eliminated.
This could mean the creation of a two-tier class system among people-the land and house owners and the renters for life.
What the report fails to take into consideration is that incomes are more or less stagnant and the cost of owning a home is rising faster than their ability to earn the income that is required to own a home.
The Mortgage Professionals report notes that since 2000, house prices in Canada have tripled on average, growing twice as quickly as incomes. To cover the difference, Canadians have taken on increasingly large amounts of debt, which today sit near record levels.
The point of the mortgage stress tests is to ensure that borrowers can afford to carry that debt, even in a high-interest rate environment. They are designed to reduce the risk to lenders and to homeowners. If they also happen to put a halt to runaway house price growth, that might just solve the housing inequality problem the mortgage industry is so worried about.
The only way more Canadians can afford a home of their own would be to ensure wages keep pace with inflation and the cost of owning a home doesn’t rise so fast as we’ve seen in the recent past. On the issue of wages keeping pace with inflation it is clear that it just won’t happen for the foreseeable future and there is no guarantee when it comes to real estate which is often driven by speculators and investors while those seeking to buy a home to live are forced to pay more. -CINEWS