A recent report from Canada Mortgage and Housing Corp. (CMHC) has sparked some interesting observations as far as the effectivity of stress test is concerned.
In an effort to regulate the debt level of homeowners in the country, especially in Vancouver, where the highest average home prices in Canada can be found, the Superintendent of Financial Institutions Canada (OSFI) introduced a mandatory “stress test," which was implemented early this year. The test forced uninsured buyers to prove that they could afford to pay the five-year benchmark rate or their contract mortgage rate plus two percentage points, whichever was greater.
However, the latest data on mortgage defaults (the percentage of loans that has not been collected after missed payments) showed that Vancouver homeowners have the lowest delinquency rate in the country at 0.08% – a number that stands as one of the lowest in history, according to Vancouver Courier.
It was also notable that the default rate for metro Vancouver did not change, regardless of the mortgage amount.
Vancouver mortgage holders’ credit score even rose from an average of 776 last year to 780 in the first quarter of 2018. Using credit reporting agency Equifax Canada’s parameters, a credit score of 700 ranks as “good”, and an 800 score is “excellent.”
CMHC’s principal market analyst for Vancouver Eric Bond said that delinquent mortgages had indeed decreased over earlier quarters, and he identified the robust labor market and rising home values as key factors for this improvement. “What’s behind that is a strengthening job market and rising home values, and a high level of liquidity in the housing market as well, which has given people a lot more financial flexibility,” he said.
During the first quarter of this year, the delinquency rate for existing mortgages dropped to 0.08%, down from a high of 0.6% in the third quarter of 2014, even as the average monthly mortgage payment rose to $1,800.
Digging deeper, that data can be read in two ways. First, these figures could imply that the mortgage stress is unnecessary because delinquency rates are low. Alternatively, it could mean the stress test has been effective so far since those who currently have mortgages are those who can carry their debts well.
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