Federal intervention in mortgage market also “unnecessary,” asserts think tank

The planned move to extend the mortgage stress test to those who have at least a 20% down payment is “unnecessary” and “will do more harm than good,” according to research group the Fraser Institute.

In a report and news release issued October 11, the public policy think tank – which has historically been considered right wing but describes itself as independent and non-partisan – sets out a case for why the new policy will hurt home buyers and is “unnecessary” for the Office of the Superintendent of Financial Institutions (OFSI) to achieve its goals.

The move, being introduced by OFSI this fall, will extend last year’s requirement for those with less than 20% down payment to qualify for a mortgage at the posted interest rate, which is higher than the rate they would actually pay back the mortgage, to create a buffer against future rate rises or financial difficulties. This rule lowers the amount that a mortgage applicant can qualify to borrow. From this fall, it will be extended to all new mortgage applicants, even if they have 20% down or more.

“This proposed stress test for financially sound homebuyers is unnecessary and will do more harm than good – Canadian homebuyers will pay the price,” said Neil Mohindra, public policy consultant and author of Uninsured Mortgage Regulation: From Corporate Governance to Prescription.

The Fraser Institute said its study “finds the case for implementing the stress test is weak and not necessary given the existing supervisory framework.” Likely negative outcomes that the group outlines include:

·Buyers’ access to mortgages will more limited, especially in higher-priced markets.

·Buyers could be pushed away from their preferred homes to less-desirable homes.

·Homebuyers may seek out less-regulated mortgage finance companies, which are funded by private investors and charge higher interest rates.

·Homebuyers may be choose shorter-term variable loans, which are more vulnerable to rate fluctuations than longer-term fixed-rate mortgages.

·Canada’s mortgage industry could become less competitive.

The group points out that the rate of residential mortgage arrears is extremely low, as Canadians are not in general overleveraged on their mortgages.

Dustan Woodhouse, mortgage expert with Dominion Lending Centres, told REW.ca, “This will mean a reduction in the amount of mortgage money available to a buyer of about 20%. So if you’re looking at $500K homes, you’re being told, well sorry, now you’re looking at $400,000. That’s a very significant drop... And in this next round of changes… this is for someone with a large down payment, impeccable credit, clearly documented income… And we’re saying all this in the face of rising home prices. So it seems odd that the government is handicapping Canadians in the way that they are.”

Woodhouse added, “OSFI’s mandate is the stability of the Canadian banking system. Period full stop. They are not worried about the consumer, they are not worried about condo prices in Vancouver. They are looking at the banking system, and finding concern in the stats on household debt numbers, and feel these steps are worth taking to preserve the stability of the banking system.”