An Overlook on the Stress Test

A prominent economist has added his name to the growing number of industry pundits who are urging regulators to revisit the B-20 stress test regulations. Benjamin Tal, CIBC Capital Markets Deputy Chief Economist, is calling for a more flexible benchmark for the B-20, which took effect in January 2018 for all uninsured mortgages.

Tal feels that the stress test was probably necessary to, as he puts it, “save some Canadian borrowers from themselves”. However he seriously questions the 200-basis point number (all borrowers must qualify at a rate which is the highest of 200 basis points above their contracted rate or the qualifying rate which is now at a lofty 5.34%).

Tal maintains that B-20 as it currently stands doesn’t take into account the following key terms:

• The rise in average personal income in Canada
• The gain in equity over the course of the mortgage term
• The lower risk of longer-term mortgages

Tal is certainly not the first to urge regulators to take another look at B-20. In recent months, several real estate boards have also called on the Office of the Superintendent of Financial Institutions (OSFI) to revisit the stress test in order to cut potential homebuyers some slack. They argue that the rule is making it more and more difficult for would be homebuyers to qualify for a mortgage, which, in turn, is negatively impacting the house market.

Meanwhile, the newly introduced First-Time Home Buyer Incentive (announced in the March Federal Budget) is not expected to have a major impact on the market. Under this proposal, Canada Mortgage and Housing Corp (CMHC) will provide up to 10% funding for new homes and 5% for existing homes to reduce the cost of mortgage payments. However, Tal says that the program won’t be a game changer, estimating that it will impact only 3%of borrowers.