Stress Test Policy Leading To A Bottleneck Of Housing Demand
As was expected by many market forecasters, the B20 Stress Test implemented as a part of Federal level mortgage policy has had negative repercussions throughout the housing market.
This is especially true here in British Columbia, with BCREA observing that residential unit sales figures in March saw a decline of 23% from the same point last year. These figures, coupled with a decline of 5.4% in residential house prices in BC in the same period, painting a stark picture of the current housing market in the province.
As a brief reminder, the B20 Stress test mandates that anyone applying for a mortgage, including those looking for refinancing, must be able to prove that they can qualify for the higher rate from the two following criteria:
- A mortgage rate that is two percentage points higher than the rate they’re applying for
- The Bank of Canada’s five-year benchmark rate, which is currently set at 5.34%
A similar effect to the one we’re experiencing in British Columbia is being seen throughout Canada. As Cameron Muir, the chief economist for BCREA, has noted, “The erosion of affordability caused by the B20 stress test has created near recession level housing demand”.
The structural factors behind these numbers are clear. By inflating the entry requirements for mortgage financing the Stress Test has affected both the supply and demand portions of the market. With fewer prospective buyers and more prospective sellers, there is a sharp decline in both prices and sales.