The Impact of the Stress Test

The B-20 stress test cost the Canadian housing market $15 billion in 2018. That was the number quoted in a CIBC report analyzing the financial impact the B-20 stress test had during its first year in existence. The report estimated that the housing market lost out on $25 billion worth of new mortgages in 2018, with just over half attributed to the stress test’s impact and the remainder due to high prices.

Any given year the GTA’s share of the entire Canadian housing market is roughly 30%. Usually a little less but in peak years sometimes more. Leveraging the $15 billion figure (it was actually $13-15 billion, but let’s use the upper limit), we can estimate the GTA’s share of the lost revenue in 2018 at $4.5 billion. This number represents the lost mortgage revenue, but as the stress test was added to uninsured mortgages, we can also estimate the lost down payment revenue the market would have received at just over $1.1 billion. Using these numbers, this post will explore what TREB’s volume, average price and sales numbers could have been in 2018 had the stress test not been introduced.

B20 adjusted reveneSource: TREB, CIBC ‘In Focus’ April 16, 2019, Six Housing Sense

In the average year, roughly 70% of home purchases in the GTA are from the resale market versus the new build. Taking this percentage, we can estimate that given the $15 billion lost nationally to the B-20 stress test, TREB lost out on just under $4 billion worth of sales revenue in 2018. This additional revenue would have still represented a 15% drop from 2018; however, it would have meant that TREB’s total volume remained above 2015 levels versus its actual performance that fell below.

There are many ways the additional revenue could have been distributed across the market. For the sake of simplicity, the following two graphs show two scenarios: if the additional gains were attributed entirely to higher prices given the sales that were achieved, and the additional sales that could have materialized from the extra investment while holding average price constant.

B20 price adjustedSource: TREB, CIBC ‘In Focus’ April 16, 2019, Six Housing Sense

Applying the additional revenue to prices, the average price in 2018 improves from $787,187 to $822,821. The additional investment would have improved all prices by $35,634 or 4.5%. This would have meant that instead of the average price for the year falling by 4.3% compared to 2017, prices would have remained flat, gaining nearly $250.

B20 adjusted salesSource: TREB, CIBC ‘In Focus’ April 16, 2019, Six Housing Sense

On the other hand, had the additional revenue not changed prices but added more sales to the market, TREB would have seen an increase in total sales by 3,501. The extra home purchases would have allowed TREB to stay over 80,000 sales for the year; however, this number still would have equaled a 12% reduction from 2017.

It is more likely that had the B-20 stress test not prevented this revenue from being realized by TREB, the additional spending would have slightly improved prices and sales, as opposed to falling 100% one way or the other. Meaning prices still would have dropped for the year in comparison to 2017 and sales would have been much lower too. This implies that the stress test was not the only factor hurting TREB in 2018.

It is important to note that while half of the lost mortgage revenue was attributed to the stress test by CIBC, they also accounted for the other $10 billion in lost revenue due to the high prices. With no one arguing that the stress test has helped control prices, there is no way of knowing how much revenue would have been lost to high prices without the stress test in place last year. Suggesting that while the stress test may have prevented $15 billion in mortgage revenue nationally, it likely also helped to maintain some element of affordability (especially in Toronto). By achieving this, it kept some investment in the market that would have otherwise left thus potentially offsetting some of its impact. Unfortunately, that number is a lot harder to quantify, but it likely would have been in the billions.

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