We may have just been given the first indication of how the mortgage stress test has impacted borrowers – and the results aren’t looking great for young buyers trying to get into the housing market.
According to a recent report by TransUnion, balances for mortgages issued to millennials fell 19.5 per cent between Q4 2017 and Q1 2018 – the period in which the latest stress test took effect.
Older Canadians, meanwhile, saw their own mortgage balances grow during that same period. Mortgage balances for the Pre-war/Silent generation grew by 7.8 per cent.
“This dichotomy might suggest two very different phenomena—the older generation may be leveraging the equity in their homes for miscellaneous financing purposes, while Millennials may find themselves unable to afford more expensive housing, and hence are opting for lower-value homes,” Matt Fabian, director of research and analysis for TransUnion Canada, says in the report.
Downsizing Home Buying Expectations
The Canadian Government announced a new mortgage stress test late last year, which went into effect Jan. 1. It requires all home buyers to qualify at the greater of either the Bank of Canada’s posted five-year fixed mortgage rate (currently 5.34 per cent) or two percentage points more than the contracted rate (the mortgage rate a buyer pays).
Essentially, the stress test makes it harder for Canadians to qualify for a mortgage and, in many cases, forces buyers to either delay purchasing or choose a more affordable home.
According to James Laird, president of CanWise Financial, the decrease in mortgage balance among millennials is an indication that they are feeling the effects of the stress test.
“According data from Transunion, millennials in Canada have been the hardest hit by stress tests that came into effect on January 1, 2018,” he says. “Policymakers should look at this data and ensure that the effects are in line with the goals of the stress test.”
Has It Been Too Effective?
Laird also argues the sobering stats should encourage the government to explore ways to give young buyers a leg up in the market. After all, any sort of negative impact on this cohort of buyers is surely an unintended consequence of the mortgage policy.
“Policymakers should also consider implementing strategies to assist millennials in entering the housing market,” Laird says. “One way of doing this could be to help them manage the transactional costs of homeownership by introducing rebates similar to what we have in Ontario for the Land Transfer Tax.
“Policies and programs which help millennials save for a down payment, such as the Home Buyers Plan, could also help the cohort overcome a big financial barrier to homeownership.”