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The federal government’s mortgage stress test accounted for at least half of the decline in new mortgages started last year, according to a new CIBC report that calls for a revision of the measure.
The total value of new mortgages fell by 8%, or $25 billion, in 2018, Benjamin Tal, deputy chief economist at CIBC World Markets, said in the report released on Tuesday. He estimates that the stress test made up $13 billion to $15 billion (50% to 60%) of that drop, while increasingly unaffordable home prices and rising interest rates accounted for the other 40% to 50%.
"I think that B-20 was necessary in order to save ... some borrowers from themselves," Tal said, referencing the official name for the stress test. "However, I think that it has to be a little bit more flexible, more dynamic."
Tal argues that B-20 doesn’t take into account rising interest rates. He said that the test doesn’t consider where we are in the cycle and what the likelihood of rates rising by 200 basis points is – the amount plus the qualifying mortgage rate at which uninsured borrowers must prove they could service their mortgage.
The test also doesn’t take into account that borrowers’ incomes are likely to rise throughout their mortgage term, that borrowers pay back a significant amount of their outstanding principal over the term, and that those who take on longer terms decrease risk.
CIBC’s report also found that the test contributed to a rise in alternative lending. Alternative lenders accounted for about 12% of the total number of transactions in Ontario in 2018, a roughly 2% rise since B-20 came into effect in January of that year.
To make the test more flexible, Tal suggests establishing a floor, like 4.5%, that borrowers have to qualify at even if mortgage rates fall below it or using a figure smaller than 200 basis points, like 100, at certain points in the cycle, according to a report by The Canadian Press.
