The Mortgage Stress Test has backfired

BY JAY BRIJPAUL

The mortgage stress test was implemented by the Ontario Government with the intention of slowing down rocketing house prices. It worked for a while; however, it has created a new set of problems. With the stress test, buyers qualify for 20% less mortgage.

Many buyers are forced out of the market and proceed to rent. With an influx of tenants, rental rates are climbing astronomically. I recently sold a 2-bedroom condo that was rented for $1250.00 monthly. The new buyers bought the property for their own use and the current tenants were searching for other accommodations. I decided to assist the current tenants and that’s when I discovered a bigger problem. I visited about twenty apartment buildings and there were no vacancies. I eventually found one vacancy at $1850.00 plus the cost of hydro. That’s a whopping 50% increase in rent which these tenants could not afford. An average buyer spends 32% of their income towards their mortgage and property tax. Many tenants are paying over 40% of their income towards rent. This is a disturbing trend as landlords are getting richer and tenants are becoming poorer, widening the financial and economical gap.

With the stress test, many buyers choose to live in condominiums because it is cheaper than homes and they meet the qualifying guidelines. With an influx of buyers, the condo market took off and prices shot up.

The current policy creates a blackhole for first time buyers. Instead of stress test, the government should have installed other measures to assist. We should tackle the problems and not the symptoms. The problem is the lack of affordable housing.

One solution is for the government to purchase blocks of land and swallow the development cost.  Affordable homes can be built with a frozen land lease.  A frozen land lease simply means that the land value and monthly cost remain the same over the term. Usually, the term can be set for 25 years, giving buyers the opportunity to purchase it when they are financially secure. The cost of a home is about 50% land value and 50% building value. Since homeowners lease the land, the home prices will be more affordable. Since the buyers do not own the land, buyers can pay less land transfer taxes on purchase and less property tax as well. Speculators and investors should not be allowed to purchase these properties. A more affordable supply would help to release steam from the housing pressure pot.

Another solution is to remove red tape on secondary suites and encourage homeowners to retrofit them. Grants should be given to homeowners to retrofit a secondary suite instead of penalizing them for not retrofitting. Basement apartments are safer than apartment buildings, one reason being that in the event of a fire, it is more accessible. A retrofitted basement would provide safe accommodation for tenants and extra income for homeowners. The extra rental income can help buyers qualify for higher mortgages.

The stress test is a good barrier, it’s designed to curb the escalating cost of homeownership, but it is broken. First time buyers should be allowed to buy based on the current qualifying guidelines of 32% of their gross income being used for owning at current interest rate. With that, buyers will qualify for more.

Mortgages are designed to be paid off over 25 years. If the period is longer then the monthly payment will be lower. For example, if a buyer pays $2,000 on a 25 year payment plan, then increasing the plan to 50 years will reduce the amount to $1,000 the plan will become more affordable to a greater number of buyers. The danger is that with more affordable mortgage payments, buyers will opt for bigger mortgages and house prices will skyrocket. With some tweaks, more buyers can afford to own homes at reasonable prices.

In 1989, interest rates went up drastically and home prices crumbled. While this was a harsh measure, it worked. Many speculators and investors bolted, and the price remained low for a longer period.

Shelter is a vital necessity and if we do not address it, our future will be bleak with wealthy landlords and generations of deprived tenants. We need to attack the problem and not the symptoms.