Sixteen months after being introduced, the federal government’s mortgage stress test continues to be felt in all corners of the housing market, says a new report by TD Economics.
The report, Assess the Stress: Examining the Impact of the B-20 Rules on Housing 16 Months Later, said the mortgage rules distorted sales activity before and after implementation.
“By our reckoning, the B-20 has lowered Canadian home sales by about 40,000 between (the fourth quarter of) 2017 and (the fourth quarter of) 2018, with disproportionate impacts on the overvalued Toronto and Vancouver markets and on first-time homebuyers,” said TD Economics.
“The supply side of the housing equation – both existing and new – was also not spared, with fewer existing homes on the market and fewer new units in the pipeline. Some would-be buyers were prompted to continue renting, further straining already-tight rental supply. All else equal, if the B-20 regulation was removed immediately, home sales and prices could be eight per cent and six per cent higher, respectively, by the end of 2020, compared to current projections.”
For the most part, the rules have contributed to bringing down housing activity to a more sustainable level. However, developments should be closely monitored, the report says. There is certainly scope to tweak the guidelines if circumstances change and/or housing markets undershoot expectations, explained the report.
“From the standpoint of regulators and the central bank, the B-20 guidelines have been working to improve mortgage quality, slowing credit growth and stabilizing household leverage,” said TD Economics.
Other consequences were either more surprising and/or unintended, including sales weakness lingering longer than expected, increased tightness in rental markets and the migration of some borrowers to riskier alternative lenders.
“These developments need to be monitored. The impact on the first-time homebuyers was also notable, prompting the federal government to follow up with some relief measures in the latest budget. This speaks to the importance of maintaining flexibility going forward with respect to tweaking the B-20 rules, especially if circumstances change or if housing markets continue to undershoot expectations.”
– Mario Toneguzzi