Young and middle-class Canadians are being denied the opportunity of homeownership due to the rigorous mortgage stress test, according to a report released January 23 by Mortgage Professionals of Canada (MPC).
In its 2019 Annual State of the Residential Mortgage Market in Canada report, the group came down hard on federal mortgage regulation policies, saying that the stress test introduced in January 2018 was largely to blame for the current housing market slowdown. MPC argued that many buyers were now unable to get into homeownership at all, while others have had to buy a cheaper, less desirable home to qualify for a mortgage.
Paul Taylor, president and CEO of MPC, said the slowdown in key markets across the country is steeper than anticipated. “We are seeing downward trends and/or depressions in areas like the resale market, the outlook on employment in the housing construction sector, and a continued decline in rental vacancy rates,” stated Taylor. “Federal policy changes are disqualifying potential first-time homebuyers and creating immense pressures on the rental market which is in turn driving rental prices higher. It is a spiralling problem.”
Report author and MPC chief economist Will Dunning cited a comment made in the same annual report one year ago, which read, “By the time of the next federal election in October 2019, about 200,000 Canadian families will have encountered sharp personal disappointment as the direct result… (they will either have significantly reduced their housing expectations in order to obtain financing, or been entirely prevented from buying a home).”
The 2019 report added, “This is all unfolding substantially as we expected a year ago.”
Dunning argued that the federal government’s promise to help middle-class Canadians prosper was being undermined by the mortgage stress test and other market-tempering measures. He wrote, “Most fundamentally, Canadians, especially young, middle-class Canadians, will, in very large and growing numbers, be denied the opportunity to build their financial futures through home ownership. The current federal government came to power largely based on its promises to support the middle class. Its policies that constrain home buying are at cross-purposes to those promises.”
Renting vs owning
The report also cited a recent MPC analysis of the costs of renting versus homeownership in 266 cases of varying housing types and locations across Canada. The study found that homeownership was less expensive than renting over the course of a lifetime, making homeowners much more financially stable than renters in the long term.
“In terms of total monthly costs, renting costs less than owning. However, the monthly cost of homeownership includes large amounts of repayment of principal, which is a form of saving. Therefore, it is reasonable to net-out principal repayment from the cost of ownership. On this net-cost basis, the cost of ownership is lower than the cost of renting in 202 of the 266 cases (76 per cent). This is for the first year. Once the person is in the home, the monthly cost will increase more rapidly on a rental basis than for an owner-occupant, because the mortgage payment is fixed… Over the course of a lifetime, ownership is much better financially than renting. Consequently, owners have much more 'net wealth' than renters in the same age groups and income brackets. It isn’t just that they have more housing wealth – the lower cost of homeownership has allowed them to save more in other forms.”
The report concluded, “The mortgage stress tests, by making it much more difficult for Canadians to become homeowners, are going to significantly impair their long-term financial well-being.”
Dunning added that there could be wider economic effects of a housing price correction. He wrote, “Constrained growth of house prices will dampen consumer confidence compared to what it would be otherwise, and this will gradually impair job creation across the economy.”