Mortgage stress tests were introduced some years ago as an added security to protect the overall lending market from risky first time home buyers. Stress tests were intended to prove that first time buyers would be able to pay their mortgages in the event of their borrowing rates going up. There have been calls to scrap stress tests, or ease qualifying rates, but the Office of the Superintendent of Financial Institutions has declined to do this. It has opted to keep stress tests in place without any changes to their qualifying criteria. The minimum qualifying rate will stay at the greater of the mortgage contract rate plus 2% points, or 5.25%. Buyers who can put together 20% or more for a down payment don’t have to worry about the stress test, a benefit with average home prices starting to decline. OSFI officials have resisted calls to lower or eliminate stress tests, and complain that doing so would be “speculative” on mortgage rate cycles. Regulators see stress tests as a financial stability mechanism, not a tool to lower housing or increase housing demand.
Turning now to the U.S. inflation rate and actions by the U.S. Fed – a new admission by Fed Chair Jay Powell needs to be aired. Powell was asked whether the Fed would consider raising its 2% inflation target. Powell was quick to respond definitively in the negative, saying that the Fed would not consider doing so “under any circumstances.” However, as he wrapped up his answer, Powell admitted that raising the inflation target might “be a longer-run project at some point“. This admission lines up with what some market analysts and experts had been hinting at, that a 2% inflationary target in the current macro economy is going to be very hard to manage. The higher the central banks raise their rates, the more damage they will inflict on the underlying economy – and rate hikes have not yet resulted in a steady and consistent decline in inflation. The markets immediately took this as a dovish signal, even as Powell raised rates by 50 basis points and hinted at more rate hikes on their way next year.
Wall St. billionaire Bill Ackman was quick to tweet that the 2% inflation target was no longer “credible.” Ackman pointed to de-globalization, alternative, higher priced energy, the demand for higher wages, and supply chain issues as all pointing to the need for a higher inflation target. He suggested the Fed would eventually be forced to raise its target in the near future. A higher inflation target would simply be a capitulation to higher prices, and less pressure on the bank to respond hawkishly with higher rates. This sentiment could quickly catch on at the Bank of Canada and would have implications to Canadians. Ackman tweeted further that he doesn’t see inflation coming back down to 2% in the U.S. without a “deep, job-destroying” recession. Highlighting the extent of the inflationary problem in the U.S.
