In January 2018, the housing landscape was subjected to significant changes after the OSFI introduced a mortgage stress test for uninsured buyers. A stress test had already been applied for insured buyers starting in late 2016. This has allowed companies like Genworth MI Canada (TSX:MIC) to avoid most of the fallout, while also benefiting from improved margins due to higher interest rates.
According to a recent report from Mortgage Professionals Canada, about 100,000 Canadians have been prevented from buying a home by the new stress test. The report also stated that 18% of prospective buyers would fail a stress test. Resale activity had also plummeted 12.5% year over year, according to the report. The home ownership rate in Canada has also dipped to 67.8% from 69% in 2011. The latter point has become a contentious political issue in recent years, particularly in large metropolitan areas.
In July, the CMHC announced that it would take measures to make it easier for self-employed workers to qualify for a mortgage. As it stands now, a worker needs at least two years of self-employed work to qualify at any income rate. Self-employed people currently make up 15% of the Canadian population, according to the CMHC.
The new rules will allow other factors to support a lender’s decision to move forward with financing. Some of these factors will include the stability of said business, predictable earnings, previous training and work experience, and sufficient cash reserves. The move has been praised in particular for the help it will provide for younger demographics, who are increasingly moving into positions that are not salaried.
Back in June, I’d discussed how the “gig economy” might change investor strategy for millennials. This trajectory will also shape the housing market of the future. Intuit Canada released a report in January 2017 that projected independent contractors and on-demand workers would make up 45% of the Canadian workforce by 2020.
The proliferation of contract work and self-employed people is something the housing industry will be forced to plan for. This move by CMHC is a solid forward-thinking measure, but it is unclear whether or not it will bump up home ownership in the years to come.
This move is noteworthy for investors due to the impact it will have on lenders. The new OSFI rules that were imposed in January caused a dim forecast from much of the industry. Alternative lenders like Equitable Group (TSX:EQB) and Home Capital Group (TSX:HCG) both projected in quarterly reports last year that the measures would slow loan growth. These lenders have been an attractive target for self-employed people in the past, as banks typically have more rigid qualifiers. This move should grant these entities even more flexibility.
In the aforementioned report from Mortgage Professionals Canada, it also forecast a grim picture of the economic impact of freezing more Canadians out of the market. It projected that going forward the rate of home ownership could cost up to 140,000 jobs into the next decade. The report also forecast that the economy would create 200,000 fewer jobs because of the anemic growth in the housing sector.
The CMHC has clearly made itself aware of these criticisms and sought to make things easier for a growing section of the working population. The policy comes into effect in October of this year.