Mortgage stress test takes a bite out of new mortgages

Accounted for an estimated 50 to 60 per cent, or between $13-$15 billion, of the overall decline

The mortgage stress test, B-20, accounted for an estimated 50 to 60 per cent, or between $13-$15 billion, of the overall decline in mortgage originations (the process by which a borrower applies for a new loan, and a lender processes that application) throughout 2018, according to a new report released Tuesday by CIBC Economics.

The report, by economist Benjamin Tal, said growth in mortgage originations continued to decline in 2018. The value of new mortgages fell by eight per cent, $25 billion, during the year.

“Note, however, that the slowing in the pace of mortgage origination growth started well before B-20 was introduced. In fact, originations hardly grew at all during 2017. So, B-20 was imposed on a market that was already on a slowing trajectory,” said the report.

Benjamin Tal
Benjamin Tal

“Now, B-20 can impact borrowers in two ways. If you don’t qualify under the new provision, you can simply exit the home-buying space, or you can settle by compromising and buying a smaller or cheaper house, accompanied by a smaller mortgage.”

The report said that the vast majority of the decline in mortgage originations in 2018 was due to fewer borrowers, down by 4.9 per cent, as opposed to a smaller average mortgage.

Since the introduction of the stress test at the beginning of 2018 real estate associations across the country have consistently pointed to it as a main reason for the drop in MLS sales activity.

On Monday, the Canadian Real Estate Association said home sales through Canadian MLS systems edged up 0.9 per cent in March following a sharp drop in February. But that still left activity near some of the lowest levels recorded in the last six years.

Sales activity fell 4.6 per cent year over year to the weakest level for the month since 2013. It was also almost 12 per cent below the 10-year average for March.

“It will be some time before policy measures announced in the recent federal budget designed to help first-time homebuyers take effect,” said Jason Stephen, CREA’s president. “In the meantime, many prospective homebuyers remain sidelined by the mortgage stress-test to varying degrees depending on where they are looking to buy.”

“March results suggest local market trends are largely in a holding pattern,” said Gregory Klump, CREA’s chief economist. “While the mortgage stress test has made access to home financing more challenging, the good news is that continuing job growth remains supportive for housing demand and should eventually translate into stronger home sales activity pending a reduction in household indebtedness.”

– Mario Toneguzzi

mortgage stress test

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