How the stress test is actually helping buyers
By Sam Reiss on May 23, 2018
“Buyers knocked out of the market by the stress test are being saved, not persecuted,” says Globe & Mail writer Rob Carrick in a recent article.
With interest rates still not far off historical lows, 5% of the economy “highly exposed to a sales slump in housing” (according to a year-old RBC Economics report), and the potential impact of a decline in consumer spending following a fall in home values, “Cumulatively, the economy could be seriously affected,” he says.
While it may feel like legislators are squelching the Canadian dream, Carrick says the stress tests are “doing the important work of protecting lenders and borrowers in overheated markets at a time of rising interest rates.” It’s a good reminder that homeownership, while desirable, is not the right of passage we’ve mythologized it to be.
Don’t get me wrong — obviously I’m a fan of homeownership. Even in a balanced, moderate market, a family home is a good long-term investment with the considerable bonus of giving families places to grow and plant roots.
But a little long-term perspective would help moderate our dizzying GTA market, which would let more people pursue the dream if it’s what they really want. I mean futureward long-term perspective, but also backward. Homeownership wasn’t always viewed as quite the entitlement it is now.
From ancient Egypt to the Roman Empire, through Medieval Europe and early America, land ownership was not only a major measure of wealth, but the exclusive purview of the already-wealthy, a perpetual motion machine that helped the rich grow richer while keeping power out of the hands of the peons. It’s only in the last century or so that smaller homes on small plots of land became readily available to the masses.
Ironically, the post-war boom and the decades since, in which regular folk have increasingly pursued homeownership as a measure of success and a hedge against a rough retirement, have led major markets to feeding frenzies like ours; taken to one conclusion, we may be creating circumstances that take us full circle, pricing private homeownership out of reach for most “folk” and making it once again an option only for the super-rich.
What goes up will come down; I just hope it comes down gently. According to Carrick, the stress test is actually saving some would-be buyers from getting in over their heads. Sometimes we all need to remind ourselves that prices can’t go up and up and up forever with no checks.
A U.S.-style bust is the worst-case scenario, and only those whose wealth survives will be in a position to pick up cheap real estate when the smoke clears — and hang onto what they already have, with their wealth giving them immunity to the worst of the dips and the longevity to hang onto it all until things go up again.
The stress test is the type of regulation needed in order to prevent a bust like we saw in the U.S. If the stress test is impacting home sales and lowering prices, I believe a big part of it is psychological, as some potential buyers sit on the sidelines, waiting to see what happens with the market.
Remember what they say — those who don’t learn from history are doomed to repeat it. Buying a house you can afford, stress test and all, is still the smartest real estate move the average buyer can make.
