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Mortgage Stress Test Continues to Hurt, Say TD Economists

May 6, 2019
3 mins
A young woman sits on her couch, drinking a coffee and scrolling on her phone in bright, trendy downtown apartment

You may have heard news reports that housing prices are down. According to a new brief prepared by TD economists, that's primarily because of one factor: people can't get mortgages.

That may be an oversimplification of the bank's analysis. But the new TD report claims that the mortgage stress test, introduced in January 2018, has decreased buying power. As a result, sales have slowed, prices have dropped, and families are forced to remain in their current homes. First-time home buyers have continued to rent, placing strain on the already tight rental supply.

So what's the solution? For those TD economists, it's relaxing the strict mortgage stress test rules.

Refresher on the Mortgage Stress Test

The mortgage stress test added a new requirement for borrowers. They now have to demonstrate they can still meet mortgage payments even if interest rates were to rise by 2%. The regulations applied to the major banks, with other lenders like some credit unions also choosing to apply the test voluntarily.

Effects on the Market

The TD analysts put the blame squarely on the mortgage stress test, commonly called B-20, for the decline in home sales. The bank states there were about 40,000 fewer home sales between the last quarter of 2017 and the same period the following year, which it says are directly attributable to the new regulations.

Borrowers have also moved to alternative lenders, who are not subject to B-20, in greater numbers. TD puts this figure at 8.7% in the second quarter of 2018, up from 5.9% the year prior.

The stress is particularly hard on first-time homebuyers but also affects those who want to move out of their starter homes to accommodate growing families. Forced to stay with their current lenders, these individuals cannot look for a better mortgage option because they cannot meet a new stress test.

TD predicted that with lower demand for homes, housing starts will decline through 2020, with potential ripple effects through the economy. But removing the stress test immediately would lead to an 8% increase in sales and a 6% increase in prices by the end of 2020, over and above the bank's current projections.

Does Everyone Agree?

Even the TD report admits that the B-20 regulations overall have helped curtail housing activity to "a more sustainable level," but says this shift should continue to be monitored. Guidelines should be modified if the housing market underperforms.

Meanwhile, back in February 2019, a government of Canada representative had a different take on the effects of the stress test. Carolyn Rogers of the Office of the Superintendent of Financial Institutions defended the policy as what's best for Canadians.

"The escalating cost of homeownership in Canada, and its knock-on effects on the economy and to our society, is a problem. But the answer to that problem cannot be more debt. And particularly, it cannot be more consumer debt, fuelled by lax underwriting standards."

Despite this assertion, Rogers admitted the short- and long-term effects of the new rules must be monitored and adjusted when and if it becomes appropriate.

The Latest Mortgage Options

The ever-changing housing market may lead many Canadians wondering about their options. To see what's out there to help you finance your first or next home, check out mortgage guides on


The RATESDOTCA editorial team are experienced writers focused on sharing stories and bringing you the latest news in insurance and personal finance. Our goal is to provide Canadians with the information and resources they need to make better insurance and financial decisions.

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