Mortgage stress test has negative economic impact: report

‘Each housing start that is lost has an economic impact that is 10 times greater than for each lost resale transaction’

The construction of new homes and home renovations are turning sharply downwards due to the mortgage stress test, which in turn will impact regional economies across Canada, says a new report.

mortgage stress test
Another policy error?

The False Binary, authored by Will Dunning, chief economist with Mortgage Professionals Canada, calls on the federal government to engage in discussion about the defects within the policies of the mortgage stress test and to consider changes that will limit the worst consequences.

“Each housing start that is lost has an economic impact that is 10 times greater than for each lost resale transaction,” said Dunning, in a statement. “The adjustments for new construction occur quite gradually. The economic impacts have barely begun, will develop slowly, and won’t be fully experienced until the second half of 2021.”


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The mortgage association said the stress tests are blunt instruments that cause undue pressure to several regional economies across Canada. They are also directly impacting the prospects for first-time home buyers and others looking to enter the housing market and build equity. Left unchecked, the framework could contribute significantly to the development of recessions in some economic regions, it said.

“For some time, our association and others have emphasized that the major defect within the stress tests is that they fail to consider the income growth that will be experienced by the mortgage borrowers,” said Paul Taylor, president and CEO of Mortgage Professionals Canada.

“At two percentage points above the actual contracted rates, the stress tests on insured and uninsured mortgages are causing serious and undue negative impacts to the Canadian economy and to the housing market. We advocate for prudent amendments to the current framework. This includes a stress test of 0.75 percentage points to account for higher income and reduced mortgage principal.”

In conclusion to his report, Dunning wrote: “One of the greatest risks to the Canadian economy is a policy error that causes house prices to fall and thereby (and totally unnecessarily) causes an economic recession that does great harm to hundreds of thousands of Canadians. I worry about that.”

– Mario Toneguzzi

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