Is a stress test hike the wrong move?

Mortgage Alliance president says OSFI proposal "does not make a lot of sense"

Is a stress test hike the wrong move?

The prospect of the mortgage stress test level being raised “does not make a lot of sense,” according to Mortgage Alliance president Peter Aceto.

The Office of the Superintendent of Financial Institutions (OSFI) announced last week that it intends to raise the current test level to 5.25%, or two percentage points above the market rate, whichever is higher, and is currently seeking submissions from stakeholders ahead of possibly implementing the new rules on June 01.

Aceto said that the stress test, first implemented in 2018, was a good idea to ensure stability in the housing market, but that increasing the threshold for homebuyers was the wrong step.

“For me, making that buffer even bigger doesn’t seem like the most logical tool to help borrowers and lenders, and to cool down the housing market,” he told Mortgage Broker News.

The current stress test level is 4.79%, based on the current average five-year posted rate at Canada’s biggest lenders, as per the B-20 Guidelines. The Bank of Canada slashed its five-year conventional mortgage rate from 4.94% last August, but that trajectory has been reversed due to continued sky-high demand in the housing market.  

Instead of hiking the stress test, Aceto said that federal, provincial and municipal authorities could pursue other measures, including addressing the difficulties that new homebuyers have in entering the market.

“One of the biggest struggles concerns new homebuyers, and families trying to get into the housing market,” he said. “Making it harder for investors to participate, in a more surgical way, might be a better way to solve the problem.”

Aceto said that the proposal to hike the stress test level also did little to rectify the fact that demand is currently far outstripping supply of housing in Canada, one of the reasons for the currently madcap market.

“Creating more supply to match the demand is a very hard thing to do,” he said, “but I think it’s something that would be better [than increasing the stress test]. It’s definitely something that we should be working on now.

“I think the government has the largest role to play in terms of getting the supply and demand dynamic right. I think that the affordability that exists today, that was put in place with B-20, made a lot of sense – but making that buffer bigger does not make a tremendous amount of sense to me.”

Ways that the government might address that supply shortage, Aceto said, include incentivizing developers to build houses and initiating the government sale of land. “I think that’s a better, more sustainable way to solve the problem,” he said.

That support for federal intervention to address the current supply shortage in the Canadian housing market was also echoed recently by Michael Bourque (pictured below), CEO of the Canadian Real Estate Association. He told Mortgage Broker News that with the federal government currently spending some $15 billion annually on infrastructure, it could create conditions around allocation of those funds to municipalities in order to ensure that land becomes available for building and red tape is reduced.

“Most of the impediments to new buildings are at the municipal level, and municipalities are the ones that are always asking for infrastructure dollars to help them,” he said. “This is the best way to get municipalities to change their behaviour as soon as possible.”

Possible intervention to cool the housing market has become a hot-button issue of late, with federal minister of families, children and social development Ahmed Hussen asserting last week that reforming the capital gains tax exemption is not on the agenda following some speculation that action on that front could slow down the market’s rapid pace.