Are current mortgage rules too Strict?

Are current mortgage rules too strict? No

Evan Siddall Opinion Tues., March 5, 2019

The mortgage stress test is like Buckley’s cough syrup: “It tastes awful. And it works.”

Some young Canadians are finding it harder to buy homes. Mortgage insurance levels have declined by 15 to 20 per cent since the minister of finance extended the stress test to five-year mortgages in October 2016.

“The real reason young people can’t buy houses is that they are just too expensive,” writes Evan Siddall. “And along with new housing supply, the stress test has prevented houses from being even less affordable.” (Rene Johnston / Toronto Star)

It requires lenders to underwrite mortgages using an extra interest rate cushion above prevailing interest rates. And since January 2018, the Office of the Superintendent of Financial Institutions (OSFI) has applied it to uninsured conventional mortgages as well.

Some short-sighted people say the stress test is unfair to young home buyers. After all, Canadians have become accustomed to saving through home ownership. We worry about saving enough to retire, or even having a place to call our own.

Hidden behind this thinking is a faulty assumption that house prices will keep increasing. And it is true that a young couple who buys a $500,000 house and sells it for $625,000 after five years will have earned an investment return of $75,000 after repaying the mortgage and brokerage fees. This is the false promise of some people in the real estate business, who aren’t thinking beyond the next commission cheque.

Opposing view: Are current mortgage rules too strict? Yes

The problem is that this rosy outlook won’t always be true. And price gains in our large cities can’t be expected to go on forever. Trees don’t grow to the sky and FOMO — fear of missing out — is pushing financially vulnerable people to buy houses they can’t afford. And that’s bad for all of us.

The impact of falling house prices can be catastrophic, as we saw during the global financial crisis of 2007-08. Recessions hurt us all but they hit vulnerable people the hardest, including new homeowners.

Excessively high house prices can trigger financial crises that have broader consequences: of the 46 banking crises for which we have house price data, two-thirds were preceded by housing boom-bust cycles. If that happens again, it will be highly indebted first-time home buyers who lose the most. And without the stress test to reign in mortgage underwriting, some of them would have debt of over 4.5 times their income.

If our young couple’s home actually loses value and they are forced to sell, they are much worse off. They will lose all of their equity plus another $10,000 or so if prices fall just 10 per cent. And if prices fall 25 per cent — rather than increasing that amount, the couple will have lost their investment all over again. Rather than pocketing $75,000, they would have to write a cheque for over $80,000 more — and will also have lost all of the equity invested in their home.

Young Canadians have so much to lose because our mortgage insurance program permits them effectively to borrow $83 for every $1 of down payment. In fact, some provincial down payment support programs exacerbate their financial leverage. In some cases, we are giving overstretched home buyers too much help. The stress test tones down this already generous government assistance. At an effective penalty of around $1.20 per month for every $1,000 borrowed, it really isn’t that onerous.

The real reason young people can’t buy houses is that they are just too expensive. And along with new housing supply, the stress test has prevented houses from being even less affordable.