The introduction of the stress test last year has made it more difficult for some Canadians to enter the market. While TREB has called for the test to be reviewed, a recent analysis by Toronto-Dominion Bank found that house prices could rise as a result of eliminating the lending rule.
The increase in house prices would be directly caused by a boost in housing activity if the stress test was removed.
It’s no secret Canadian home sales have taken a hit since the rule was implemented in January 2018. In the first three months, sales dropped by a drastic 20 per cent. Additionally, between Q4 2017 and Q4 2018, home sales were down by roughly 40,000, TD reports.
Eliminating the stress test would allow more Canadians to qualify for a mortgage, thus causing a rise in housing activity. However, prices would climb in the long run as well. Specifically, home sales and prices could increase by 15 and 10 per cent, respectively, by the end of 2020, according to the analysis.
This 10 per cent price surge — which is roughly an increase of $32,000 — is up from the current projection of four per cent.
“I think it’s quite clear that affordability would be impacted, and housing would by and large be less affordable as prices increased as demand was stimulated. So I think it would likely be a bit harmful for affordability,” TD economist Rishi Sondhi told the Globe and Mail on Tuesday.
The implementation of the stress test has caused a ripple effect in the market. With fewer prospective buyers qualifying for a mortgage, home sales have declined and many have turned to the rental market. This has then caused vacancy rates to further decline.
While the pros and cons of the stress test continue to be debated, a separate TD survey found that nearly half of Canadians (43 per cent) aren’t confident in their understanding of the mortgage lending rule. Additionally, 59 per cent don’t understand how the test would affect them when buying a home.
The test was put in place to help ensure home buyers would not become financially strained if their rates increased in the future. All mortgage applicants are required to prove they can make payments at their qualifying interest rate plus two percentage points or the Bank of Canada’s five-year benchmark rate, whichever is greater.
Click here for more information on what you need to know about the mortgage stress test in 2019.