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Mortgage stress test should be killed, not tweaked

Misguided policy drove rental vacancies to the lowest level in 18 years and rental rates to record highs
Young first-time home buyers stress

During the 2019 federal election, the Liberal government promised to make changes to its mortgage stress test. It acted on that pledge this February, but the minor – and likely useless – modification does not come into effect until April 6 and will do little to undo the damage already done.

It is first-time buyers and renters who have been hurt the worst under this misguided policy.  

The nation-wide mortgage stress test forces all buyers, regardless of their income or assets, or local market conditions, to prove they can still qualify if the mortgage interest rate suddenly increased. With the change, the stress test will still require buyers to qualify at a higher mortgage rate than what is readily available in the market.

When the stress test was introduced, the number of first-time homebuyers immediately plunged, dropping from 56 per cent of purchasers in 2018 to 47 per cent last year, translating into more than 41,000 potential buyers who remained renters, according to data from Canada Mortgage and Housing Corp.’s recent State of Homebuying in Canada. Many other would-be buyers were also frozen out.

The result was the Canadian rental vacancy rate fell to 2.2 per cent, the lowest level in 18 years, and rental costs soared 4.6 per cent in 2019, up for the second year in a row to a new record high.

In places like Edmonton, where the benchmark detached house price is $425,000, among the lowest of any major city, the mortgage stress test became a deal killer.

“That was a federal policy to put downward pressure on Vancouver and Toronto, and it has absolutely stolen the equity from homeowners and it has killed the market here. We don’t have a need to have a stress test in Alberta,” said Jennifer Lucas, chair of the Realtors Association of Edmonton.

It also failed to cool home prices. By the end of 2019, the benchmark price for a home in Greater Vancouver was still above $1 million, it was up seven per cent in Greater Toronto and, nationally, homes were 3.4 per cent more costly than a year earlier.

Today many Canadians are motivated to buy a home but cannot qualify under the mortgage stress test. They also cannot afford to rent because, in most cases, monthly rents are higher than a mortgage payment and are still rising.

Rents will increase again in 2020, according to the January National Rent Report from and Bullpen Research & Consulting, rising between three and seven per cent, depending on the market.

The answer is to not to tweak but to kill the mortgage stress test and, wonders of wonders, let consumers decide if they can qualify for a mortgage.