Stress Test Relief!

There’s a very big real estate story that isn’t getting much widespread coverage in the community. When federal regulators announced the unveiling of tighter rules on uninsured mortgages and mortgages with down payments of less than 20 percent, the market sputtered.

The move was designed to clamp down on risky mortgages, tighten confidence in the housing sector, and to cool a market that was literally on fire. The tests required that borrowers needed to prove they would be able to manage the costs of their mortgage if rates were to rise. Experts believed the move single handedly knocked out 10% of prospective buyers from having a shot at sealing the deal on a home purchase. We’re talking about tens of thousands of people, at the least. The stress tests were praised by experts, economists, and some bankers but were lambasted by the real estate lobby and politicians. 

After almost a year of criticism and calls for reform we finally have some relief. The rate at which a mortgage holder has to qualify being able to pay for has now gone down from 5.43% to 5.19%. While not a significant change, it will have an impact on those prospective buyers on the margin. Some experts believe that the continuation of a lessening trajectory could have a significant impact on the market, with as little as a further 0.50% reduction lifting thousands into home ownership. Tim Hudak, CEO of the Ontario Real Estate Association asked for federal regulators to restore 30 year insured mortgages, to further ease stress test rules for new homebuyers, and to scrap the requirement that those who change their lender on an existing mortgage have to also pass stress tests. With an election rapidly approaching, don’t be surprised if further loosening of these rules continues, real estate has been repeatedly polled as one of the biggest concerns on peoples’ minds.

 

Finally, when Canadians were asked to pick which city they would own real estate in, the result, quite strongly, was Toronto! That’s right, our city is seen by most average Canadians as the best place in the country in which to own a home. Despite Vancouver’s beautiful natural environs, great weather, and lack of winter blues, and Montreal’s thriving cultural scene, affordable prices, and great food choices, Toronto still won out. Unfortunately for those polled, rents and home prices continue to rise in the city, with one metric showing that the price for two bedroom and one bedroom units is effectively the same. The demand for ANY space is so great that it doesn’t matter how many bedrooms it has. This summer continues to deliver positive news on the real estate file. 

Mortgages Stress Tests Are Slowing Canadian Real Estate Market

The head of one of the country’s largest and most influential real estate bodies has made a strong case to one of the nation’s foremost regulatory bodies to ‘revisit’ its support of stress tests. The head of the Toronto Real Estate Board has complained that stress tests are too cautious and are having an extreme dampening effect on the market.

As a reminder to our readers, stress tests were implemented by the federal government in 2017 to reduce risk of poor mortgage lending and to shore up the housing market.

Stress tests scrutinize mortgage buys from prospective buyers with deposits at less than 20% of the purchase price and with no mortgage insurance. Stress tests provide incentives to purchase mortgage insurance, which can be costly, and add another layer of analysis to the already comprehensive mortgage approval process. Canada’s already notoriously conservative banks were made even more scrupulous with the introduction of the stress test.

Stress Test Have Dampened Demand

Stress tests were designed to demonstrate whether a low deposit mortgage could withstand a 2% added interest rate cost from the BOC. The effects of these stress tests have been to dampen demand. Research has shown that stress tests effectively blocked up to 100,000 first time home buyers from being approved for a mortgage. They were supported by risk-averse bureaucrats and economists who fear a housing bubble and who are worried about the quality of mortgage issuance in the country.
In response to these complaints, the OSFI, or Office of the Superintendent of Financial Institutions, Canada’s core banking regulator, stated that it will be sticking to the stress tests. In addition, it made the point that the stress test adds a margin of safety that is ‘prudent.’ With weakening real estate data spreading around the country, pressure from real estate bodies and experts on regulators and the Bank of Canada will continue.