The big deal

By gelding the mortgage stress test the feds just doled out a giant gift. No, it’s not to the kids who can now borrow more, swallow additional debt and offer a premium for inflated houses. Instead, it’s to the real estate-industrial complex. The lenders. The insurers. The reno guys. The appraisers. And, above all, the realtors. Sorry, that should be Realtors®.

As you know, the Trudeau guys – the ones who surrendered on Thursday to the lawless aboriginal protestors – dropped the stress test hurdle this week by about a third of a point. By changing the formula, the qualifying rate fell from 5.19% to 4.89%. It’s a big deal. The first meaningful drop since the thing was created. And it comes at a weird time – when nobody needed to step on the gas.

Here are a few of the reasons this sucks…

First, it’s spring, almost. At least there are cherry blossoms in Vancouver and hormones everywhere. This period – March through May – is the strongest of the year for residential real estate sales. Prices always peak before settling back a bit for the summer. The nesting instinct grows irresistible as the green shoots erect. Otherwise reasonable people turn into goey masses of residential desire, stumbling through open houses muttering, “Where do I sign?”

Second, major markets are toasty, verging on boiling. Prices have been snaking higher in Toronto, southern Ontario, Ottawa, Montreal, Halifax and even in YVR and Victoria. Not only has the impact of the stress test faded in the last two years, but mortgage rates have plopped to near-historic lows while listings have shriveled along with them. More demand and less supply is a formula for price pressure. Homeowners watching property values inflate have concluded they can’t afford to move, may not pass the test if in need of more financing, or just want to bank bigger gains before bailing out. In any case, they ain’t going to market.

Third, the ‘housing crisis’ that every government has been trying to address comes down to one word. Affordability. The average family can’t afford the average house in these places, given the asset inflation that’s occurred since central banks trashed rates back in 2009. So how will reducing the stress test and giving buyers more borrowing power improve affordability? Right. It won’t. Things just get worse.

Fourth, making mortgages fatter by allowing buyers to qualify for greater amounts means more debt. Sheesh. Already we’re at record debt-to-income levels. A majority of buyers in the GTA, for example, have ratios of 450% or more. The savings rate is down. Four in ten people have trouble servicing existing debts. Mortgage totals now exceed $2 trillion. Is it remotely responsible for the government to signal that borrowing should increase?

And, as a result, you can kiss off any further Bank of Canada rate cuts. At least for a while. Seems the central bank is the only adult left in the room these days, worrying about the steaming mountain of borrowing and the potential negative impact that could have on the entire economy – which is two-thirds made of consumer spending.

Meanwhile the national mortgage association says the stress test is still too high, “especially given our current economic climate and general expectations of future interest rates. Uncoupling the stress test from the Bank of Canada rate is the right public policy move but a reduction in the percentage test itself is also needed.”

Yeah, right. And everybody gets a pony.

On Thursday I spent time with a couple who emigrated here (from Cuba) a dozen years ago. Nice people. One kid. Rent in the GTA where he’s an engineer. At 50 years of age, they’ve managed to save about $250,000, which is a true accomplishment after starting with nothing – including no English.

Mars wants to invest this money since they have no pensions. Venus wants a house. “All of our friends say they’re making so much money and that we’re throwing it away on rent. The bank says we can afford a house worth about $750,000.”

Said Garth: buying would erase your savings, give you a half-million mortgage debt, double monthly living costs, impact saving for your kid and in ten years you’d have to sell and hope for enough of a gain – after fees, expenses and elevated monthly costs – to fund retirement. What a gamble. After scratching your way this far, why take the risk?

“But did you hear?” she said. “They just dropped the mortgage rules!”

I give up.