Housing

Canadian Mortgage Stress Test Replayed

Mortgage Stress Test Rules

The Canadian government is under pressure to do something about the soaring prices of houses in Canada. To release some of that pressure on itself, the government is replaying an old trick at an opportune moment — to capitalize on the current temporary downtrend in home prices.

The Liberal government is desperate to show it is doing something to resolve the housing crisis in Canada. The mounting housing crisis has resulted in hoards of immigrant families stuffed into homes across Canada’s cities, leaving them extra vulnerable to Covid 19 disease.

The overcrowding plight has lead to high rates of Covid-related death in regions such as Peel near Toronto, where residents were actually accused of “irresponsible behavior” during the pandemic. That’s added insult to injury.

Weak Government Unwilling to Resolve the Housing Problem

This replay of an old, weak regulatory response also used 4 years ago, simply raises mortgage qualifying requirements for borrowers who are deemed “at risk” should interest rates rise substantially. Ostensibly, they would find themselves unable to pay their mortgage payments at a later date.  What then is a 30 year fixed rate mortgage? What is a fixed rate mortgage?

According to the current government, this is a group of desperate, irresponsible, overleveraged buyers who should not be borrowing to buy a home in Canada. They previously cited real estate investors as the culprit, but this time made no mention of that group of buyers who needed “controlling.”

Some finance experts have rumored that the Canadian government is eager to raise rates, irrespective of what is happening in the US and globally. However, raising interest rates in Canada would harm the undersupplied housing market by discouraging investment and discouraging new home construction. It would however, increase Canadian bond prices and potentially aid in the government’s debt financing struggles.

Mortgage Restrictions Applied Like a Sledgehammer

Canada’s housing market is diverse with some regions having been under little price pressure until the last two years. The major metros including the Vancouver housing market and Toronto housing market have seen record breaking price growth with no end to rising prices in the housing forecast. It’s a severe problem where homebuyers are seeing buying as a safer route than renting a home.

Buyers see buying as a hedge against inflation and a way to avoid homelessness.  The rental market has become even more squeezed than the purchase market resulting in severe hardship for renters paying more than half of their wages for renting.

Killing the Canadian housing market and keeping some buyers out of the market comes with a steeper price of higher rent prices and even fewer rentals available, just as the government accelerates its immigration quest this year and into 2022. That one million people will need housing, which isn’t going to be available.

The intent to raise immigration at a time of severe housing shortages is not just bad judgement, but should come under legal scrutiny because of the harm it creates in communities. The situation might be worse in the US, but this in no way pardons the Trudeau government and provincial governments stifling of housing construction, thus affordability.

The Liberal government announced no changes to help provide more housing availability and affordability of housing which would reduce home prices and reduce mortgage risk.

Play it Again Justin

Previously in early 2017, the government made drastic changes to mortgage lending rules and applied them to the entire country, irrespective of the toil that some markets were experiencing, including Calgary and Edmonton whose economies were suffering due to oil distribution restrictions and lower oil prices. It provided a negative shock, which the government proudly proclaimed would control predatory investor speculation and price rises.  They simply tried to crash the housing market as a general solution and claim victory.

Similar to now, the housing markets in Toronto, Vancouver, Montreal, Mississauga, and even Calgary were already showing signs of cooling (prices too high).  Some suggested the government was merely trying to make it look as though their measures caused the market decline and stopped the menacing price rises. And interestingly, this is how the event came to be read in the media.

Yet, stopping price rises isn’t a solution, if the problem is those prices are too high already and unaffordable.  And now with rent prices rocketing, an additional problem has to be faced (high cost of living plus homelessness).  You can see how a recession might be a desirable option for the government.

If the Liberal government had acted to support home building in 2016, prices wouldn’t have shot up 30% and the issue wouldn’t be such a cost problem for Canadians, many of whom can’t buy a home with minimum wage jobs.

Tightened mortgage rules however did contribute to a painful situation for everyone outside of Vancouver or Toronto. These measures caused immense damage to the Canadian economy and resulted in reduced home construction, thus feeding into the current housing problems of 2020/2021. Unfortunately, the media won’t report on these chain reaction events because they support the Liberal party.

The Canadian government has adopted a propaganda style name for their program, dubbed the “mortgage stress test.” Previously, in 2017, it was used for fear of foreclosures and a perceived failing economy (which the Canadian government controls) yet the economy, in fact, did not fail.

And in 2020, the Canadian government’s own Canadian Mortgage and Housing Commission (CMHC) forecasted a strong drop in the housing market, yet that didn’t happen either. In an embarrassing turn of events, the department actually withdrew the forecast entirely, and is now posting new predictions which they believe will be taken seriously by the public.

The new Mortgage Stress Test Rules for 2021

The government announced the minimum qualifying rate for uninsured mortgages (residential mortgages with a down payment of >20%) will be the greater of the mortgage contract rate plus 2% or 5.25% starting today June 1.

An insignificant change yet in alarmingly poor judgement.

All comments on the controversial regulatory change center around possible foreclosure issues and harm to Canada’s banks (who are under scrutiny for digital price gouging on bank account fees). Canada’s banks have posted record breaking profits and have said they are strong and can easily weather a recession.

This tactic of trying to suppress demand is especially negative when housing is in such short supply.

The Canadian government is prepared to be judged based on the direction of housing prices from June 1st onward. Their wager is that the small drop in demand from Millennials who won’t meet the new guidelines, will be enough to send home prices down across the country.

Mathematically speaking, such a small drop in demand will likely have no effect at all in the Montreal real estate market, Calgary real estate market, Kelowna real estate market or Toronto real estate market.

The key point in the housing market mess in Canada or the US, is that trying to kill demand artificially within an artificially regulated market only leads to further suffering.

The real solution to this mess is expanded construction in NIMBY controlled cities and towns. The cause of high home prices is regulation of home building (apartments, condos, multifamily, and single detached houses) and a destruction of supply.

And in the housing market, builders are ready to build, and eager to help revive the economy (good jobs, domestic production) but can’t get permission or funding or risk insurance to provide people with homes.

The focus on mortgage stress tests in Canada is a political smoke screen designed to appease urban voters. The move exacerbates the housing crisis and deserves public outcry.

There are to key points showing the Government fraud:  increased immigration (foreigners were said to be causing the home price rises, which was found to be untrue) and lack of support for home building.  The weak measures related to destroying demand shows the real mettle of this government.  It’s cosmetic changes in exchange for urban and immigrant votes.

Canadians Deserve to be Treated with Respect

With the Liberal governments push for more immigrant votes and rights, Canadians deserve to be treated better, but don’t seem to care where this is leading. The pall of indifference and apathy is troubling. Perhaps, we all believe and hope the positive momentum of economic growth will roll right over the pessimism of the Liberal government. However, if the momentum slows, we could see another round of recessionary business closures and bankruptcies. It’s all unneeded, and we should be acting to enforce our rights to adequate housing.

The basis of the housing problem in Canada, is politically fueled dishonesty and incompetence. They get away with it, because no one feels energetic enough to demand change.  Let’s hope Canadians will care enough to understand the cause of the lack of housing supply and growing homelessness.

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