One year after implementing the stress test, OSFI needs to analyze its impact on the marketplace and consider the damage done, writes Darren Robinson
We finally had some good news late last year when the BoC decided to pause rate increases and hinted at a lower chance of increases in 2019. While this was music to brokers’ ears, it comes at the price of a slowing economy still reeling from the oil crisis out West and what could be an extended trade war between the US and China, which could have a lasting negative effect on our economy. Is this just a plateau on our way to 6% rates, as Moody’s Analytics recently predicted?
The risk of a Canada-wide housing recession seems to lessen each month, proving that OSFI’s B-20 rule changes (specifically the stress test) had far-reaching and dramatic effects since their implementation last January. This, in combination with rising interest rates, has turned many potential homebuyers off.
I believe the media played a large role in scaring consumers at the beginning of the year by telling them that it would be difficult for would-be homeowners to obtain a mortgage under the new stress test. The majority of my clients have heard of the stress test, but they had little or no knowledge of what it was or how it was calculated.
For other clients, it has been a real barrier that almost forced them out of the market altogether. This required us to look to one of the provincial credit unions or a MIC to avoid the stress test, which unfairly subjected these clients to higher interest rates and fees. Further, the need for a co-signer has also been steadily increasing. I often have to discuss this topic with first-time homebuyers to make the debt servicing numbers work.
Another flaw with the B-20 rules is the blanket approach taken to national housing issues. We are continually bombarded with news stories warning about the housing ‘bubble’ in Toronto and Vancouver; however, the new rules are having a disproportionate impact on smaller communities, causing those markets to ‘overcool.’ I would like to see a more targeted approach to ‘problem’ markets that would level the playing field.
The past few years of OSFI rule changes have forced brokers to take a hard look at their business models to determine how they can insulate themselves from continual government intervention. I started by expanding my mortgage offerings. I found myself having to look outside my typical A client to find B clients and private funding opportunities. This broadened focus really helped me grow my business.
Additionally, two years ago, I decided to get my life insurance licence to further differentiate myself from other brokers and to diversify my offerings. This allows me to offer my clients a more holistic approach to their finances. So, in a strange way, the increasing regulations have forced me to evolve into a more valued financial partner to my clients.
Another cost to brokers from the B-20 changes: many missed opportunities to convert renewals as a record number of mortgages mature. The increasing interest rate environment has made it difficult to compete with clients’ current lenders for the business.
My personal fear is that OSFI will continue to focus new regulations on alternative, MIC and private lenders instead of taking aim at the credit card and unsecured debt markets as it wages war on consumer debt loads in Canada. Such a move would diminish consumer options even further and drive homebuyers toward higher-rate loans or potential bankruptcy.
As we reach the 12-month mark, OSFI should analyze its impact on the marketplace and also take into account the role that rising interest rates have had on the housing market. While I don’t agree that the stress test should be completely annulled, as OREA and the Progressive Conservative party have called for, other options are worth considering. For example, in the short term, it would be great to see the stress test rate cut in half for conventional mortgages. Doing so would soften the current impact on the market while still providing some security.
It would also be wise of the OFSI to figure out a way to target any new rules geographically to help level out the economic impact. For buyers in markets not affected by Vancouver and Toronto's fevered activity, some stress test relief certainly is needed in the near future.
