A permanent generation of middle-class renters?
This week’s housing newsletter was written by HuffPost Canada senior business editor Daniel Tencer.
To no one’s surprise, Canada’s mortgage industry really, really doesn’t like federal regulators’ new mortgage stress tests. Its principal industry association, Mortgage Professionals Canada, released a report a few weeks ago on the impact of the tests that is almost apocalyptic in tone. It blames the stress tests for this year’s housing market slowdown, estimating that the reduced real estate activity will mean Canada will create 200,000 fewer jobs over the next three years than it otherwise would have.
About 18 per cent of prospective homebuyers in Canada would fail the stress test on their desired home, the report found, meaning they would have to buy a less expensive home or save up for a larger down payment.
On average, these buyers will now be short nearly $29,000 for their purchase, economist Will Dunning estimated in the report. (He was much more forward in a report last month for his own economic research firm, in which he called the mortgage stress tests “truly stupid” and “unnecessarily and ridiculously dangerous to the economy.”)
In the view of many in the industry, the stress tests — which require borrowers to qualify at a rate that’s some two percentage points higher than what’s being offered on five-year fixed mortgages — are excessive. Mortgage Professionals Canada is suggesting Canada’s banking regulator reduce the test to 0.75 percentage points above offered rates. But the group’s report goes further than that. It suggests that the tougher new federal regulations risk creating “a permanent generation of middle-class renters … as the ability to own homes and generate long-term equity becomes more and more difficult.”
“More and more young people are getting used to the idea that they may never own a home and become permanent renters.” – Mortgage Professionals Canada
What’s more, it sees the growing phenomenon of buyers taking money from “the bank of mom and dad” as a bad sign for the future of home ownership. “This means that there will be ‘rationing’ in the housing market,” Mortgage Professionals said in a press release. “The ability to purchase will be increasingly determined by the buyers’ opportunities to get help from parents. The actual circumstances of prospective buyers … will become less important than the circumstances of their parents.”
The report may have a point there. But the mortgage industry is pointing the finger of blame at the wrong target. It’s years of eroding affordability, not mortgage stress tests, that created this problem. Long before the stress tests came along, some experts were warning of exactly this. “Parents will only be able to help if they themselves are wealthy homeowners, so you could have a landed wealth-owning class perpetuating through the generations,” author Max Rashbrooke told HuffPost Canada in 2016. “At that point being born into the right family matters a lot.”
This 2017 chart from the OECD shows Canadian households have some of the highest debt levels in the world.
The single biggest contributor to the problem is house prices rising faster than incomes. The Mortgage Professionals report notes that since 2000, house prices in Canada have tripled on average, growing twice as quickly as incomes. To cover the difference, Canadians have taken on increasingly large amounts of debt, which today sit near record levels.
The point of the mortgage stress tests is to ensure that borrowers can afford to carry that debt, even in a high-interest rate environment. They are designed to reduce the risk to lenders and to homeowners. If they also happen to put a halt to runaway house price growth, that might just solve the housing inequality problem the mortgage industry is so worried about.
Source: Huffpost Canada.