Canada would need a “calamity” in the housing market to warrant adjusting the mortgage stress test, which is helping affordability, according to the head of Canada’s national housing agency.
Evan Siddall, chief executive officer of Canada Mortgage and Housing Corp., said in an interview Monday that he became a passionate defender of the tougher mortgage qualification rule because he felt no one else was publicly standing up to support the federal program against criticisms from groups working in the real estate sector.
“If we ease the stress test or extend mortgage amortizations, for sure it is increasing debt and it’s going to bump prices higher," he said. “And those aren’t good for the country. And nobody was speaking out,” he said, adding that it’s the people who make money off real estate who are complaining.
Mr. Siddall said he has received strong support from other policy-makers and economists, and from the general public via his Twitter feed, which he is using actively to challenge the real estate industry’s positions on the regulation.
“The real estate lobby is on the wrong side of this issue, they’re being intensely self-interested, and somebody had to call them on it frankly because they were getting traction," Mr. Siddall said.
Several groups, including representatives for mortgage brokers and home builders, have urged the government to adjust the stress test, saying it is proving to be too severe and is keeping many people from getting mortgages and buying homes, especially younger first-time buyers. The stress test on uninsured mortgages was introduced on Jan. 1, 2018, and requires home buyers to prove they could afford their mortgages even if interest rates were to rise two percentage points beyond the level they negotiated with their bank.
Mr. Siddall said he is convinced the test will make housing more affordable over the long term, despite short-term pain. Home builders in the Greater Toronto Area have complained, for example, that they have been laying off employees this year as new home sales fall.
Mr. Siddall said the CMHC expected some decline in economic activity as home sales declined as a result of the stress test, but he believes the real estate sector has grown too quickly to account for more than 7.5 per cent of Canada’s GDP in 2018 from less than 4.5 per cent in 2000.
“The fact that people are getting laid off in the long run doesn’t make it a bad thing. We shouldn’t have had that much of our economy in that area. We need to reorient economic activity. I’m not saying it’s not hard on people,” he said.
Mr. Siddall said he would consider adjustments if there was evidence of more significant market turmoil. While national home sales slid 11 per cent in 2018 – and far more in the Vancouver and Toronto markets – he said the market changes have been welcome, and have not been not chaotic.
“Some kind of disorderly adjustment would be a problem ... but disorderly in the sense of bubble-bursting collapse calamity,” he said.
During a panel discussion in Toronto on Monday, Mr. Siddall parried with CIBC World Markets Inc. deputy chief economist Benjamin Tal about the need to modify the stress test.
Mr. Tal said he believes the stress-test formula should be more flexible so it can be adjusted as interest rates rise or fall, and added that he has seen no coherent policy reason to set the stress test at two percentage points.
“Maybe we have to inject a little bit more science into this," he said during an event hosted by the Global Risk Institute, which focuses on issues of risk in the financial sector. "I really don’t know where it came from, and I think that if there is research around it, we need to see it.”
Mr. Siddall, however, said the current stress test has the benefit of being simple to explain and sell to federal politicians and the public.
“When you’re trying to convince a minister to make a decision, you ought to make it simple and communicable and you don’t want to have to go back and have the conversation too many times. And if it’s really complicated, like it’s floating or whatever Ben is suggesting, then [the minister] can’t sell it to the voting public. ... I’m not suggesting that conversation happened, I’m just suggesting that’s the generic state of play.”
The test is impacting the lives of “millions and millions” of Canadians, Mr. Tal replied, and “the cost of simplicity here is too high." But Mr. Siddall said that to change the metrics, “you’ve got to convince the Minister of Finance and his cabinet colleagues."
Mr. Tal shot back that if the reason to have a “suboptimal” test is because the Finance Minister doesn’t want to change it, “to me that’s not a good answer.”
Also Monday, Mr. Siddall provided more details about a new federal incentive for some first-time home buyers, which will see the CMHC provide up to $1.25-billion in interest-free loans over three years to help supplement a home buyer’s down payment in exchange for an ownership stake in the property. The program will launch in September, which he said should be in time to help people during the busy fall buying season.
Home buyers will share any increase in value with the government when the house is sold, Mr. Siddall said, or could buy out the government earlier if they wanted. They would have to repay the government after a maximum of 25 years if the house is not sold.
Mr. Tal said he thinks the incentive is "a good program," but that the criteria to qualify have been tailored so narrowly that "it's simply not big enough to make a significant difference."
“Perfect,” Mr. Siddall replied, saying that CMHC “spent months” trying to find a “Goldilocks” design that would help some would-be homeowners without moving the broader market. “And we’ll see how it works.”
When asked by an audience member for his views on the prospect of extending amortization terms on CMHC-insured mortgages beyond 25 years, to 30 or even 50 years, Mr. Siddall responded bluntly: “If you extend amortization, you’re increasing demand and increasing debt. So you know my answer: I think it’s dumb,” he said, adding: “Fifty years is dumber than 30.”
Janet McFarland
James Bradshaw