Canada’s mortgage stress test is taking a toll on new house construction, with building activity expected to drop by as much as $8-billion this year alone, a new report estimates.
A study released Wednesday by Mortgage Professionals Canada, which represents mortgage brokers and others working in the lending sector, says there has been an 8-per-cent drop in residential construction investment in the first quarter of this year compared with the average during the period from 2015 to 2017.
The low-rise housing construction sector – including detached and semi-detached houses – is hardest hit, recording a 25-per-cent decline in the first quarter of 2019. That represents an estimated $600-million monthly drop in low-rise house construction activity, which would equal $7-billion to $8-billion annually, the report says.
The report, written by housing economist Will Dunning, said there is no fundamental economic reason for house construction to be tumbling, with the economy strong and Canada’s population growing at its fastest rate in a generation.
“This construction activity should now be expanding, not contracting,” Mr. Dunning said.
In an interview, Mr. Dunning said he did not try to isolate the impact of the stress test from other factors that have contributed to lower home sales, such as last year’s interest rate increases and changes in buyer attitudes that left more people on the sidelines unwilling to purchase in a turbulent market. But he estimates the new mortgage qualification measure could be responsible for as much as half the building decline.
His new study is another salvo in a growing battle over the impact of the federal government’s moves to toughen mortgage qualification rules for home buyers. The stress test was introduced on Jan. 1, 2018, and requires home buyers to prove they could still afford their mortgages even if interest rates were significantly higher than the rate they negotiated with their lenders.
The Bank of Canada released a recent review saying the stress test is not the main factor behind declining resales of existing homes in the past two years, while Canada Mortgage and Housing Corp. chief executive Evan Siddall said last week the stress test is working as anticipated to cool overheated markets. He also said real estate groups are battling the stress test because they benefit from rising home sales.
But real estate industry groups, including Mortgage Professionals Canada, argue the stress test should be modified because it is having too great an impact on home sales and is putting home purchases out of reach for many first-time buyers.
Mr. Dunning’s report said builders and lenders have stakes in the outcome, but that doesn’t mean their views are wrong. Government officials have their own personal stakes in how their decisions are viewed, and rather than admit errors and change policies, they “dig in," he wrote.
“Maybe that’s what’s happening now in the mortgage and real estate file," he said.
CMHC maintains its support for the stress test, saying it is aimed at “vulnerabilities” from growing household debt. In an e-mailed statement Wednesday, chief economist Bob Dugan said the fact it is affecting sales “shows that it is working.”
The report said new home construction has been slower to reflect the impact of the stress test than the resale home market because there are longer lead times. Condominiums and apartments, for example, are still showing strong construction activity because of the high volume of preconstruction sales more than 18 months ago.
The report suggests the high-rise sector will likely see construction investment begin to slow in the later part of 2019, and could decline more steeply by 2021.
Including an additional dip in renovation construction spending on existing properties, Mr. Dunning said the combined drop in all types of residential construction investment could reach $20-billion to $25-billion in 2021. That would mean a corresponding loss of 200,000 jobs.
“The jobs impact that have occurred so far might just be one-tenth of the eventual total,” the report said. "The economic adjustments have barely begun, and they will take a long time to play out.”
The worst-case scenario is that the stress test leads to a major drop in home prices that triggers a “severe recession” in Canada as home owners face a dramatic loss of wealth in their homes, spurring a drop in consumer confidence, the report warned.