IMF cautions Canada not to let up on the mortgage stress test

By: Lisa Coxon on May 22, 2019

Despite repeated calls from real estate boards for Canada to ease the mortgage stress test restrictions, the International Monetary Fund (IMF) released a report on Tuesday telling the country to do exactly the opposite.

“The government is under pressure to ease macroprudential policy or introduce new initiatives that buttress housing activity,” the report states. “This would be ill-advised, as household debt remains high and a gradual slowdown in the housing market is desirable to reduce vulnerabilities.”

The B-20 mortgage stress test, which took effect in January 2018, requires lenders to test borrowers by seeing if they can actually afford mortgage payments at the Bank of Canada’s five-year benchmark rate, or two percentage points above their actual mortgage rate — whichever is higher.

The stress test was introduced in order to cool the housing market, which it appears to have done successfully. CIBC economist Benjamin Tal estimated in a report last month that the stress test is responsible for an 8% decline in new mortgages started in 2018, which equates to a nearly $15 billion loss for the mortgage market. That said, Tal is one prominent economist who has advocated for revisiting the test, as it’s significantly hindered people’s ability to afford a home at all.

Seeing the IMF weigh in on the stress test debate signals widespread concern that Canada’s housing market is not yet stable enough to withstand a revision or outright removal of the stress test — and that doing so could hurt the economy.

Created in 1945, the IMF consists of 189 member countries that are “working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world,” according to its website. The IMF’s main goal is to make sure the international monetary system, which includes exchange rates and international payments, stays stable.

Conservative Party Leader, Andrew Scheer, vowed just last week that if elected, he promises to revisit the stress test.

“I will re-work the mortgage stress test the Liberals brought in a couple of years ago that have pushed the dream of home ownership out of the reach of so many Canadians across this country,” he said.

But the IMF remains cautious about Canada changing its lending rules in order to stimulate the housing market, saying it could pose a risk to the economy.

“Looking ahead, policy priorities should focus on ensuring that the financial system remains sound and resilient, cooperation between federal and provincial governments is enhanced, and structural reforms target productivity growth.”