Regulators Conclude The Mortgage Stress Test Is Here to Stay

New data released from the Canadian Housing Statistics Program suggests there are quite a few homeowners who have accumulated more than one property. In BC and Ontario about 15% of homeowners have more than one property. And the vast majority of them are residents.

Canadians have certainly played a large role in accumulating real estate. They’ve also incurred a lot of debt in the process. First quarter data for 2019 shows the household debt servicing ratio printed a new record high.

For context, our US neighbours to the south are currently enjoying the lowest debt servicing ratio on record after taking the medicine in 2008. No wonder CMHC’s Evan Siddall continues to lament for the continuation of the B-20 Mortgage stress test. Siddall re-iterated his views in a recent piece in the Globe & Mail, “The real estate lobby is on the wrong side of this issue, they’re being intensely self-interested, and somebody had to call them on it frankly because they were getting traction.” Adding,  “If we ease the stress test or extend mortgage amortizations, for sure it is increasing debt and it’s going to bump prices higher.” Safe to say there’s no change coming on that front anytime soon. Or as Siddall put it, Canada would need a “calamity” in the housing market to warrant adjusting the mortgage stress test. OSFI also appears please with the recent “success” of the mortgage stress test. In their most recent report they noted lenders are approving fewer mortgages for the most highly indebted or over-leveraged borrowers. The proportion of new uninsured mortgage loans that exceed 450% of a borrower’s income has stabilized at a lower rate of 14%, from a peak of 20%.

Of course these borrowers have mostly shifted to one year bullet loans in the private lending space. However, things do look pretty good on the surface. Over-leveraged borrowers appear to be diminishing and uninsured mortgages, which can be extended to 30 year amortizations, have not changed at all. In a world turned upside down by near zero interest rates, and abundance of cheap credit chasing a finite number of homes, regulators seem to concur a mortgage stress test is the way to go. OSFI concluded, “The revisions to B-20 are working; strengthening mortgage underwriting across Canada and improving the resilience of the Canadian financial system to future shocks.”