26 February 2019

The tax had a necessary cooling effect.

Then, Canada’s economy started showing strong performance with great employment data and GDP growth, so the central bank began raising interest rates. As the Canadians already showed record debt levels, the end of cheap money period caused serious problems in terms of mortgage affordability. That’s why the Canadian government reasonably introduced the OSFI mortgage stress test in late 2017, then followed by an expansion in 2018 on all mortgages.

The changes caused the desirable effect. New homebuyers had to prove they were able to provide a down payment and serve their mortgage amid growing rates, which were expected in 2019.

Nevertheless, the economy started cooling down, and a 2.2% GDP growth is expected now this year, followed by 1.9% in 2020. In addition to it, we have faced the volatility from tariffs and trade conflicts. As a result, the Bank of Canada put the rate hike cycle on pause.

As you can see, the conditions amid which the stress test was introduced are no longer relatable. Rate increases are not expected now, as they have been earlier, and buyers are forced to search for unsecured lenders.

So what are the current conditions? Since the stress test was expanded on all mortgages, the inventory levels have either tightened or expanded, depending on the market sector. Today, 10% Canadians can no longer qualify for a mortgage with banks. The stress test pushed first-time homebuyers out of many markets and led to domino effect to all homebuyers’ segments. It influenced move-up buyers who need a bigger property for growing families. It led to insane activity in the rental market, as those who can’t qualify for a mortgage had to rent.

In other words, the Canadian government needs to find ways for supporting and motivating homebuyers in Canada (especially first-timers), and not for punishing them. Although the stress test had the necessary effect at the beginning, demanding to qualify at a “stress rate”, which is 2% higher than the contract one, with a 25-year amortization period, now when the market shifted to normal levels is unreasonable.