Prospective home buyers in Canada are finding it harder to qualify for mortgages, leading to more deals falling apart at the last minute due to financing problems, according to a new report from the residential construction lobby.
The Canadian Home Builders’ Association (CHBA) on Friday released the findings of a survey of its members on the impact of the federal government’s “stress test” for mortgage applicants, introduced roughly a year ago.
The test requires borrowers to show they can handle a 2-percentage-point increase in the current interest rate, and has been faulted by homebuilders, developers, realtors and others in the residential real estate market for driving down sales.
The Trudeau government justified its introduction on the need to make sure Canadians weren’t overextending themselves financially to buy a house, raising alarms about personal high debt levels and rapidly rising housing prices. A 2017 report from the Organization for Economic Cooperation and Development said Canadians were the most indebted in the world, with collective consumer debt above 100 per cent of the country’s GDP.
However, real estate industry advocates argued that fast-rising prices are only really issues in a few overheated housing markets, namely Vancouver and Toronto, and that implementing the stress test nationally was deflating activity in markets with low and stable housing prices that could benefit from increased construction activity.
The CHBA survey found that nine out of 10 builders report that their customers experienced more difficulty when qualifying for a mortgage in 2018 than in the previous year, according to the organization. They also reported a 33-per-cent drop in first-time homebuyers, while 84 per cent of builders reported an increase in the number of completed home purchase agreements that subsequently failed due to a financing problem.
“We know why the stress test was put in place, but given that economic and housing market conditions have changed, and considering the impact that all of the mortgage rule changes have had on first-time buyers, we do think it’s time for some policy adjustments,” said CHBA CEO Kevin Lee in a statement.
The Bank of Canada has increased the country’s benchmark interest rate five times since 2017, bringing it to its highest level since 2008. Housing markets in the Greater Toronto Area and Metro Vancouver have also seen slowdowns in sales since the stress test was implemented.
The CHBA wants the federal government to restore 30-year mortgages for first-time home buyers and lower the stress test interest rate increase to as low as 0.75 per cent for five-year locked-in mortgages.
At current rates, this would reduce the stress test on five-year mortgages from 5.7 per cent to 4.45 percent, and allow “many more well-qualified to secure a mortgage,” according to the group.
A longer mortgage payment period will ideally reduce monthly payments, making them more attractive and feasible for younger homeowners. The CHBA said it has raised the issue with Finance Minister Bill Morneau.