The head of Canada’s housing agency is lashing out at critics of tighter mortgage regulations, arguing the measures are imperative to prevent a housing bust.

“The potential consequences of our debt-fueled real estate boom in Canada are serious. Asset bubbles fuelled by too much liquidity create the conditions for their own demise,” Evan Siddall, chief executive officer of Canada Mortgage & Housing Corp. said in a letter to a government committee on Thursday. “The stress test is doing what it is supposed to do.”

Real estate boards, developers and some bank economists have asked Canada to ease rules introduced by the country’s banking regulator last year as housing markets have cooled, particularly in Toronto and Vancouver. Higher qualification standards are making it more difficult for homebuyers to get their foot in the door, many have argued.

Siddall said some of these critiques were “plain self-interest,” “cavalier” and of “evident moral hazard,” adding that high house prices fuelled by various factors are the reason home ownership is out of reach for many. CHMC insures mortgages for borrowers with a down payment of less than 20%.

Stress tests

The first stress test was introduced in 2010 to help prevent Canadian households from becoming overextended and applied to insured mortgages of rates less than five years, Siddall said. In 2016, Finance Minister Bill Morneau extended the requirement to five-year mortgages. In 2018, the Office of the Superintendent of Financial Institutions expanded stress tests — which require borrowers to qualify for higher interest rates than prevailing ones — for uninsured mortgages.

“In neither case is an interest-rate shock the underlying concern. OSFI will presumably want to maintain an underwriting buffer through the economic cycle,” Siddall said. “We will continue to support it for insured mortgages until debt-to-income ratios moderate significantly in Canada. The single largest risk to an insured mortgage is the homeowner’s unemployment -not higher interest rates.”

Lack of affordability is being targeted by the federal government’s first-time home buyers incentive, which will provide equity funding and reduce mortgage expenses for low- to middle-income buyers, Siddall said.

“I would ask you to see past those who insist that everything will unfold benignly, as we all nonetheless hope,” he said.

-With assistance from Erik Hertzberg.