Sarah Colucci's Mortgage Blog
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Today, the Mortgage Stress Test does not provide a purpose except to destroy opportunities for home ownership.
As a mortgage expert, my job is to facilitate financing, but since it’s become problematic for the average Canadian to invest in real estate because the Government has not changed the qualifying tests, I must also advocate for home ownership.
Aspiring purchasers that must pass the Mortgage Stress Test are qualified using unrealistic mortgage interest rates which ultimately disqualify an enormous percentage of them from owning property. Therefore, the test is a radical measure that is doing more harm than good in helping Canadians gain and preserve wealth.
Mortgage Stress Test Is No Longer Relevant
The government enforced the Mortgage Stress Test to cool a hot real estate market which was experiencing the side effects of uncontrolled foreign investment, unprecedented bidding wars and yes, crime.
At the time of implementation, average Canadians were fighting in bidding wars alongside foreign investors who possibly didn’t even require financing.
Canada Mortgage and Housing Corporation (CMHC), Genworth and Canada Guaranty were insuring homes that were worth hundreds of thousands less than the sale prices.
In some pockets of Toronto, the Greater Toronto Area, and Vancouver, homes appreciated by 52 percent in as little as three years.
It was a moment that called for intervention especially since rising interest rates and the havoc they would produce in an insanely inflated market posed a palpable risk to the financial sector.
While high-risk mortgage insurers were insuring mortgages lent on inflated property values, financial institutions were bearing an extraordinary risk of delinquency on their balance sheets. Therefore, the Stress Test had its place.
The foreign investment tax of 15 percent also had its place because foreign investors were less likely to engage in bidding wars if they had to fork over 15 percent of the purchase price to the Canadian Government.
The Government was successful in blocking a mounting pressure that might have wreaked havoc on purchasers and the economy.
As a result of the test and the tax, Toronto and Vancouver, two of the most heated areas in the country cooled. Later, the market continued to remain slow as real estate sales went down, prices went down, and both the test and the tax continued to knock wannabe purchasers out of the market.
Last year, interest rates started to rise as the Canadian economy seemed strong and resilient and made the perpetuation of the stress test appear warranted. Then, something happened that altered the relevancy of the test altogether.
Suddenly, a surge of populist movements such as Trump’s tariffs and Brexit threatened globalization and demanded federal banks all across the world to cut their overnight lending rates. Interest rates started moving down as the bond market was a secure place for investors to be and Poloz couldn’t find any reason to increase the overnight lending rate.
Fast forward to today. Interest rates are still low and the Bank of Canada has confirmed in its 2020 outlook that the economy will remain stagnant as the world awaits a technological revolution.
The Mortgage Stress Test, accordingly, no longer serves a purpose, it only destroys hopes of home ownership.
It seems unwarranted to qualify a borrower at 5.19 percent when the contract rate is only 2.64 percent. The chances of rates jumping by over two percent in just a few years are improbable and uncommon. Yet, instead of the Government conceding the preposterousness of the Stress Test in today’s environment, CMHC is telling borrowers they should reject the thought of home ownership and take up a lease, instead.
My theory is to discard the Stress Test, grant free market reign over the supply and demand of real estate. Recognize that the Stress Test had no place in Canada besides Toronto, GTA and Vancouver and that it caused and continues to cause tons of individuals to lose out on home ownership. Admit the obvious challenges with Corporations, and how incorporation in Canada can hide beneficial owners, which may encourage foreign investors to continue to tamper with our real estate markets and evade taxation.
If you are a Canadian who wishes to own a home but is considering renting to be a better option, understand that the ONLY situation that would make renting superior to owning is if market rents were modest enough to permit forced savings. And, if those savings would multiply at a significant rate of return. It’s not cheaper to rent if there is no room to save money.
Wealth accumulation through renting is a fable. Renting is not practical given the cost of living. Inflation outpaces the rise in income. Property values increase faster than savings.
Sometimes, it’s not about surrendering the dream but discovering new ways to accomplish it. I can merely anticipate the Government will scrap or change the rules that function as a barricade on the pathway to homeownership. But if not, it’s time for purchasers to think outside of the box, and that’s where I can help!
Sarah A. Colucci, Mortgage Agent Lic. M14000929, Mortgage Edge Broker 10680/Direct: (647) 773-4849, www.coluccimortgages.com
By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929