Should The Stress Test Be Scaled Back? Analysts Say Yes.

A year after the Office of the Superintendent of Financial Institutions (OFSI) introduced the mortgage stress test, financial pundits are rallying to give home buyers a break in the current real estate market where prospective homebuyers are finding it increasingly prohibitive to find homes for their families. Toronto’s real estate analysts are worried that would-be homebuyers are being unfairly kept out of the market.


The stress test was designed to ensure that homebuyers were taking on debt loads they could withstand. It dictates that borrowers prove they can handle payments at two percentage points above the mortgage rates being offered to them, without actually having to pay it. It was a measure meant to cool the housing market, after the runaway price gains in 2017. Indeed, the stress test did succeed in checking household borrowing and regulating a few inflated housing markets.But Bay Street senior economists, Benjamin Tal of CIBC and Rober Kavcic of BMO argue, “with the well-purposed spirit of the measure in mind, there might be a case to be made for the qualification rate to be scaled back in the lock-step with underlying rate increases, especially now with those rates near neutral.”


In early February, the Toronto Real Estate Board’s CEO, John DiMichele, stated that there needs to be a “realistic discussion” about the fairness of the stress test. While agreeing that due to the stress test a number of “positive government” measures have been undertaken in key housing portfolios, he questioned the imposition of the OFSI-mandated two-percentage-point mortgage stress test saying that the decision needs to be revisited. Supporting a re-examiniation of the stress test, Kavcic added, “the residential mortgage market is now, at least from a qualification perspective, well into restrictive territory.” Defending the stress test, OFSI Assistant Superintendent Caolyn Rogers said, “This is imply prudent. It’s prudent for the bank and it’s prudent for the borrower too.”


How the housing market performs in the GTA and Canada plays a vital role in job creation, economic health, and government revenues, according to DiMichele. Therefore, “policymakers need to be aware of unintended consequences the stress test could have on the housing market and broader economy,” he concluded.
What are your thoughts on the stress test for borrower qualification? We would love to hear from you!