It is not unknown that the housing markets in Vancouver and Toronto are still trying to adjust themselves. But how much of the impact has been due to unaffordability, or to higher interest rates, or to the mortgage stress test? It is hard to pinpoint to a certain factor as they are all intertwined, however, after more than a year of the mortgage stress test implementation, there are studies showing the impact that this particular policy has had on the market.
Home prices have been falling in major cities across Canada, but these markets still remain unaffordable to many people, especially first-time homebuyers. The federal government provided mid-to-low-income first-time buyers interest-free loans of up to 10% of the property value. But data shows that only 3% of borrowers have access to this loan and impacted only 0.12% of mortgage origination dollars. This initiative is too small to make a difference.
Mortgage Originations are slowing down
Since the implementation of the mortgage stress test in January 2018, growth in mortgage originations continued to decline. The value of new mortgages dropped by 8% during 2018. The slowdown in growth in mortgage originations was already declining at the end of 2017. Thus the mortgage stress test was applied to a market that was already slowing down. Most of the decline in mortgage originations in 2018 was due to fewer borrowers instead of the smaller average mortgage. Based on data, the mortgage stress test accounted for 50-60% of the overall decline in originations in 2018.
What has the Mortgage Stress Test Accomplished?
The mortgage stress test accomplished a few things. First, the more stretched financially you are, the more likely you were going to fail the test. And that’s what they wanted to accomplish, especially in cities like Toronto and Vancouver. Second, it was implemented to improve the overall credit quality in the market. And it has done its job in that. High-quality mortgages are at their high at the moment. However, some of this is due to policies that have been implemented well before January 2018.
Other alternatives generated
Although the quality of the mortgage market has been rising, the data does not take into consideration the high-risk loans that borrowers that failed the stress test had to take out using nontraditional lenders. As a whole, the lending market could be perceived as riskier. From the Ontario Land Registry, the borrowers engaging alternative lenders accounted for 12%. In 2018, they accounted for 10% meaning that their share is getting bigger.
It is important to note that alternative lending is always a player in the market. But such a fast-growing lending alternative is not. The lending market has become riskier as people are transferring from a regulated method to a not regulated method. And this was not the intent of the mortgage stress test policies.
Is the mortgage stress test enough?
The policy was implemented when the market was already slowing down, and although it helped to stop some borrowers that were becoming too stretched financially, the policy has not taken into consideration many other aspects.
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