The federal government’s mortgage stress test has done its job and it’s now time to rethink the rules, according to a leading economist.
Benjamin Tal, chief economist at CIBC, published a report citing CIBC research findings that the B-20 stress test has been responsible for a $13-15 billion decline in new mortgage loan values since its January 2018 introduction.
The stress test on new mortgage applications, launched by the Office of the Superintendent of Financial Institutions (OSFI), ensures home buyers are able to cover their payments at the Bank of Canada’s five-year posted rate or 2% above their actual mortgage rate, whichever is the higher.
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The CIBC research found that “the vast majority of the decline in mortgage originations in 2018 was due to fewer borrowers (down by 4.9%), as opposed to a smaller average mortgages. Overall, according to various sources, B-20 accounted for 50-60% (or $13-$15 billion) of the overall decline in originations throughout 2018.”
Tal said that the stress test was likely needed at the time, but it doesn’t account for rising average incomes, increases in home equity over the course of a mortgage term, or the reduced risk of longer-term mortgages. He also said that it is partly to blame for the rise in alternative lending.