Loosening the mortgage stress test will make housing less affordable

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Almost as if on cue, just as many young Canadians had their first glimmer of hope that home prices could slide toward more affordable levels, there’s already talk of a de facto homeowner bailout. Once again, government regulators may change the rules in a way that will stoke demand, juice the housing market and see first-time home buyers take on ever more burdensome levels of debt.

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Homeowner bailouts don’t look like regular bailouts where the government sends a failing company or industry big cheques. They come in the form of policies, often sold to the public under the guise of helping borrowers and first-time buyers, that spur demand and ultimately ensure home prices remain high.

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In the United Kingdom, this recently came in the form of lenders being allowed to offer 50-year mortgages. Former prime minister Boris Johnson went so far as to consider mortgages that could be passed down from parents to their kids. At least he was upfront about the fact that the goal was to stimulate housing demand.

In Canada, publicly aiming to boost demand as entire generations are effectively blocked from home ownership is a nonstarter. So instead, the government wraps demand-stoking policies in the language of affordability.

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Past examples include allowing first-time home buyers to borrow down payments from their RRSPs, increases to the first-time home buyers’ tax credit and the Liberals’ recently announced Tax-Free First Home Savings Account.

While these may help some people buy their first homes, they ensure that many more remain priced out of the market, as increasing borrowing capacity supports higher bids and inflated prices across the board. Those who are able to buy often end up with more debt and money paid on interest than they would’ve otherwise.

Now, federal regulators are reconsidering the mortgage stress test, which requires borrowers to qualify at a higher interest rate than the one they’ll actually get from their lender. The stress test, while flawed, has saved a lot of recent buyers from financial hardship as the Bank of Canada continues to hike rates at a pace not seen in decades. It also helps to protect Canada’s economy from a U.S.-style housing collapse.

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These are both good things. While housing prices need to decline to become more affordable, no one wants mass foreclosures or a severe recession. So why, just as it’s become crystal clear how much the stress test serves us, would regulators change it?

Some argue rate hikes are close to peaking, even though we really have no way of knowing that and financial forecasters have been wrong time and time again over the last several years. If rates can only go down from here, they reason the stress test is unnecessary –– so why not give borrowers a break?

Yet reducing or getting rid of the stress test altogether won’t really help borrowers. It will simply allow them to qualify for higher mortgages, which will allow them to take on more debt and place higher bids, thus increasing the price of housing for those who come after them. The cohort most helped by such a move wouldn’t be first-time buyers or younger Canadians, but existing homeowners who don’t want to watch their equity continue to fall.

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Keep in mind that most current homeowners are still sitting on huge gains. While the average national home price is down 10 per cent year-over-year, the last few years alone saw dramatic increases. And, most importantly, prices are still ludicrously high compared to wages.

Just like Wall Street banks, it’s clear that officials consider Canadian home equity too big to fail. However, any policy that would stimulate demand will only serve to make this country’s affordability problem worse. Moreover, it’ll reinforce many young peoples’ suspicions that the system doesn’t care about them and that institutions can’t be trusted.

The next while may be difficult as we wean ourselves off cheap money, but it’s a necessary hardship. If the federal government is serious about affordability, it must resist the urge to bailout homeowners and leave the stress test alone.

National Post