Alleviating the mortgage test stress
Looking at the mortgage stress test, it has helped to dampen price increases, but it has done so by taking some homebuyers out of the market. It’s time for the government to recognize that, aside from Vancouver, Toronto and potentially a few rising markets, affordability is less of a concern in most cities and provinces, which shouldn’t be subject to the same rules.
Adding to the concern is the fact that an opaque and unregulated lending market has emerged that’s creating the very risks that the stress test had tried to avoid. With traditional lending markets closed to some buyers, many have turned to private mortgage funds or the developers themselves to get the funding they need to close their homes, often at significantly higher rates. The end result is greater consumer and market risk.
Beyond the problem of unintended consequences, there’s also the issue of inconsistency in government policies. While the stress test dampens demand, for example, the government is also boosting the pool of potential homebuyers by increasing immigration.
Where governments are addressing supply issues, they’re also finding ways to benefit more directly by pursuing transit-oriented development. While transit agencies have traditionally emphasized delivering infrastructure to the public without focusing on ways to subsidize the costs, they’re now doing more to capture some of the new value created.
In June 2019, for example, the Ontario government announced it was changing the planning rules in key areas of Toronto to permit greater density along existing transit lines. The move comes as the government pursues plans to build a massive expansion through the city as part of its spring 2019 announcement of CA$28.5 billion in funding for transit.
Other options to address supply include making public lands available through long-term leases to encourage the development of purpose-built rental housing. Pursuing more of these innovative solutions to supply constraints and affordability concerns is a better way forward than current attempts to temper demand.
Black swans and ‘legislation by Twitter’
Despite recent Canadian progress on many trade-related issues with the United States, interviewees expressed continued uncertainty about the geopolitical environment, with several pointing to the possibility of what they called a black swan event that could disrupt the economy. Populism and the related political risks are a major concern, as seen in a reference by one interviewee to the impact of “legislation by Twitter.”
Whether it’s tariffs and protectionism more generally or more specific issues like Brexit or the US trade dispute with China (and the potential rippling effects on Canada), many interviewees see possible trouble on the horizon.
Also on the policy front, Canadians will be going to the polls in a federal election in October 2019. The real estate industry will be paying particular attention to any impacts on or changes to the mortgage stress test. In Alberta, interviewees will be watching the discussion about pipeline developments given the importance of that issue to economic prospects.