The Latest in Mortgage News: Time to Rethink the Stress Test
The stress test is back in the crosshairs of industry analysts.
Earlier this week, CIBC World Markets Deputy Economist Benjamin Tal released a report that attributed an 8% drop in mortgage originations from 2017 to 2018 directly to the federal government’s stress test rules (B-20), which took effect on January 1, 2018.
That translates into a $13-$15 billion drop in lending activity in 2018 attributable directly to the stress test. Overall, activity was down about $25 billion from 2017, with the difference attributed to rising interest rates and lack of affordability in the country’s key markets.
Tal notes that B-20’s impact on driving down originations was due to fewer borrowers, which was down 4.9%, as opposed to smaller average mortgages. The stress test requires that borrowers qualify at a rate 200+ bps higher than their contract rate.
Here are some of the highlights from Tal’s report:
On CMHC’s First-time Home Buyer Incentive, aimed at helping low- to medium-income first-time buyers with up to a 10% loan to be used towards the down payment, Tal said this: “This program is simply too small to make a significant difference. We estimate that, fully utilized, this plan will impact only 3% of borrowers and 0.12% of mortgage origination dollars—not quite a game changer.”
On the timing of B-20’s implementation, Tal said that originations had already been slowing well before the new rules took effect, and that originations hardly grew at all in 2017. “B-20 was also designed to improve the overall credit quality in the market. And indeed, the share of high-quality mortgages (i.e. credit score >751) in originations is currently at a record high of more than 52%. Note, however, that this trend of quality improvement was in place well before B-20 was introduced. The 21 policy changes related to residential mortgage lending introduced by governments and regulators over the past decade played a significant role in improving overall credit quality in the Canadian market. The point being that, B-20 was introduced to an already healthy credit market.”
On borrowers being able to circumvent the stress test rules by turning to credit unions and private lenders: “The improvement in credit quality is obviously a good thing. But, is that the full picture?” Tal wrote. He pointed to data showing mortgage originations provided by alternative lenders rose by a cumulative 27%, while originations in the market as a whole fell by 11%. “To the extent that more borrowers use alternative channels, due to policy changes in general, and B-20 in particular, the market might be riskier than perceived.”
Tal’s conclusion? “Regulators should revisit B-20. We need a more flexible benchmark, potentially a narrower spread over the contract rate when interest rates approach cyclical peak, and perhaps to establish a reasonable floor under which the qualifying rate will never drop below.”
Here are some of the other key headlines from recent weeks:
Stress test creating pent-up housing demand, says BCREA
The British Columbia Real Estate Association (BCREA) came out with its own report taking aim at the stress test.
It says the province recorded just 5,707 sales in March, down 23% compared to a year ago, while the average price was down 5.4% to $687,720.
“B.C. home sales continue to be adversely impacted by federal mortgage policy,” said BCREA Chief Economist Cameron Muir.
“The sharp erosion of affordability caused by the B-20 stress test is now creating pent-up demand, as many would-be homebuyers are forced to wait on the sidelines,” he added. “Unfortunately, new home construction is slowing as well, which will likely lead to another housing supply crunch down the road.”
Toronto, Vancouver among 15-most-expensive markets in the world
For the second year in a row, Vancouver ranked as the fourth-most-expensive housing market in the world in the CBRE Global Living 2019 report.
With an average price of $1,090,000, according to the report, Vancouver is more expensive than New York, London, Beijing and Paris.
The only markets more expensive are Hong Kong, with an average property price of $1,650,315, Singapore and Shanghai.
Toronto, meanwhile, ranked as the 12th-most-expensive housing market of the 35 global markets analyzed in the report with an average property price of $768,972.
“Last year, some of the best performing cities were New York, Los Angeles, Toronto, Vancouver, Sydney and Melbourne,” the report noted. “With these markets now suffering from increasing affordability constraints, they have been pushed down the list, making room for European cities where house price growth is still robust.”
Ottawa, Montreal house price growth outpacing other markets
In contrast to a sharp slowdown in Vancouver’s housing market and a more moderate decline in Toronto, the housing markets in Ottawa and Montreal are on a tear.
Average home prices rose 7.7% year-over-year in the first quarter of 2019, according to the Royal LePage House Price Survey. With forecasted price growth of 2.8% in Q2, Ottawa is pegged to have the strongest price growth of any market.
In Montreal, home prices rose 5.5% year-over-year in Q1 to $406,332, driven by the province’s robust economy and unemployment rate of just 5.3%.
CMHC declares dividend
The Canada Mortgage and Housing Corporation (CMHC) announced its first-quarter dividend payment to the Government of Canada in the amount of $505 million.
In 2018, CMHC declared a total of $4.175 billion in dividends for the whole year.
CMHC makes regular and special dividend payments to its shareholder, the government, with the largest sum paid to date being a $4-billion special payment made in June 2017.