Debating the Mortgage Stress Test: To Loosen or Not To Loosen?
By: Diana Petramala
July 29, 2019
There has been considerable debate around the Canadian mortgage stress test (implemented by OSFI1 on January 1, 2018). Since these new rules have come into effect, the Greater Toronto Area (GTA) housing market experienced the biggest and most sustained drop in resale home activity in over a decade (see Figure 1). These weakened market conditions have led many to believe that the need for these guidelines have passed, resulting in calls for the government to loosen mortgage stress test rules.
Top policy watchdogs (such as the IMF and CMHC) are on the other side of the debate, warning that risks associated with hot housing markets are far too great and that the Federal Government agency should hold firm on the mortgage stress test rules.
CUR would like to weigh in with the top three reasons why we feel maintaining the mortgage stress test, in its current form, is a prudent policy stance at this time. The primary purpose of the mortgage stress test was to ensure households and financial institutions were not taking on too much financial risk in an over-heated market. An unintended, but welcomed, outcome was a cooling in the housing market. However, there is still the risk the market could be tipped back into hot conditions despite the stress test, a risk that could rise if the government were to loosen demand-side policies. Regulators should avoid encouraging policy actions that increase demand until limitations on housing supply are loosened.