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The Canadian Real Estate Industry Is Pressuring Ottawa To Get You Further Into Debt

Daniel Tencer

Canada's real estate industry must be getting worried that the slowdown is going to hurt its bottom line. In the past few weeks, we have seen insiders launch a full-court press against the country's federal mortgage and housing rules.

Prominent voices among realtors and mortgage brokers have joined with economists at some of the country's largest banks (i.e. mortgage lenders) to call on Ottawa to revisit the mortgage stress test.

The test, which essentially requires borrowers to qualify for a mortgage at a rate that is two percentage points higher than the one they're being offered, is now obsolete, they say. It made sense a few years ago when interest rates were at historic lows, but it doesn't now that rates have risen.

Watch: The extreme measures Canadians go through to buy a home. Story continues below.


Mortgage Professionals Canada, a national industry association which represents some some 1,000 mortgage businesses and 11,000 individual mortgage brokers (the oversupply of mortgage brokers is another story), suggests the stress test should be set at 0.75 per cent above the offered rate.

Given that the discount rate for a five-year fixed mortgage in Canada is around 3.7 per cent today, this means the industry version of the stress test would only ensure that borrowers can handle 4.45 per cent. As if a higher interest rate than that were impossible, and not worth testing for.

Fun fact: The current going rate for a mortgage in the U.S. is 4.41 per cent.

Earlier on HuffPost Canada:


In the U.S., though, you get that rate for 30 years. Not so in Canada, where the typical mortgage term is five years, but the the typical amortization is 25 years.

A Canadian mortgage is a gamble on where interest rates will be up to 25 years from now. Are we sure they won't rise above 4.45 per cent in that time?

Some historical context: As recently as 20 years ago, the going discount rate on a five-year fixed Canadian mortgage was 8 per cent. It only dipped below 5 per cent when the Bank of Canada dropped its key lending rate during the Great Recession a decade ago.

Canada chartered banks prime lending rate

Interest rates in Canada in recent years have been far lower than their long-run average.

Is it really that inconceivable that mortgage rates could return to those levels again in the coming years? Especially considering that we are coming off interest rate levels that are the lowest in 5,000 years of human civilization, meaning there's little room for them to come down, and plenty to rise?

If we are serious about preventing Canadians from overextending themselves to the point of a national debt crisis, we may have to consider the possibility that the stress test may actually not be stressful enough as it is.

And apparently, the industry believes that a 25-year gamble on interest rates is too safe a bet. Another policy move they want to see is the extension of insured mortgage amortizations to 30 years, from 25 years.

If you can't get Canadians to take on higher mortgage payments because they already have the G7's highest debt burden and are beginning to freak out about what they owe, well, maybe you can get them to take on debt for longer instead.

Back to 2012

This would be a reversal of policy put in place by then-Finance Minister Jim Flaherty, who reduced the maximum insurable mortgage amortization to 25 years from 30 years. He did so because of concerns that house prices were rising too quickly, and Canadians were taking on too much debt.

That was back in 2012, when Canadians owed $1.62 in debt for every dollar of disposable income, instead of the current level above $1.70. And yet somehow it's safe again to extend mortgage lengths: The Canadian Home Builders Association says Finance Minister Bill Morneau is "considering" bringing back the 30-year mortgage.

Some experts believe Morneau should think twice before increasing Canadians' debt loads while pushing high house prices even higher.

"If you increase the amortization period you'll have people taking on more debt and as a result you'll increase prices," National Bank of Canada economist Kyle Dahms said recently. "It's hard to say if those are the right solutions."

If you can't get Canadians to take on higher mortgage payments because they already have the G7's highest debt burden and are beginning to freak out about what they owe, well, maybe you can get them to take on debt for longer instead.

In other words, affordability would worsen still, even as Canadians are saddled with more debt.

It takes some serious verbal acrobatics to sell this policy.

"The current limit of 25-year amortization for insured mortgages results in a very high rate of 'forced saving'," Mortgage Professionals Canada said in a recent report.

"Thirty-year amortization periods would also result in rapid paydown of mortgage principals and growth of homeowners' equity positions."

Translation: Canadians are being forced to save money, in the form of home equity, too quickly. (Never mind that our parents had 10-year amortizations.) If only we could keep ourselves in debt to the banks longer, it would all be okay.

Here's the real solution: Leave the (very reasonable) policy measures in place, and let the market do its work. If the industry insiders are right, and people just can't hack the stress test, then eventually sellers will have to lower their asking prices.

And then — surprise! — affordability will return, Canadian homebuyers will be able to take on far more reasonable levels of debt, and the long-term trend of rising house prices will be able to make a comeback.

Yes, homeowners would have to contend with a decline in home values. Homebuyers in expensive markets would have to save longer for the home they want, or downgrade their expectations, to meet the stress test. Real estate agents would make smaller commissions. Developers would see lower profit margins. Some land and house speculators might get wiped out.

But hey, you want to see a real economic disaster? Just let homebuyers keep taking on more debt, until one day a tiny increase in mortgage rates or a small dip in employment knocks the whole economy over like a tin shack in a desert sandstorm.

We are going to have to pay the piper eventually for excessive, unsustainable house price growth that has left home affordability at its worst levels in three decades. Better to pay today's price, than the much higher one on offer tomorrow.