Are The New Mortgage Stress Test Rules Enough?

By: Joshua Campbell

Are The New Mortgage Stress Test Rules Enough?

Tags: Real Estate, renting, buying, selling, real estate tips, residential, rent, Ontario, tenant, moving, Newmarket, York Region, first time home buyers, knowledgebrkr, add value to your home, home sales, mortgage rates, stress test


The Canadian Government recently announced changes to the Mortgage Stress Test rules. In case you did not know, these rules were brought into place after the boom of the 2017 market. To give you some context, starting in the Fall of 2016 and carrying over to the spring of 2017, the demand for homes was hitting all-time highs, fueled by speculative buyers, foreign investors and all-around fear and greed. The federal government saw this happening and in order to prevent a nationwide bubble, they quickly introduced a foreign buyer’s tax. Within a few days of announcing the preventative measure, the markets stopped. Buyers that were already committed to offers started to re-think their decisions and homeowners that sold started to worry. In the end, the markets retreated back from 25% gains to 25% losses. Many people unexpectantly came out owning more than one house as buyers walked away. Lawsuits are still ongoing, and the market effects were drastic. 
Following this move, in January 2018 the federal government put the final blow on the market by introducing the mortgage “Stress Test”. While this measure was to safeguard buyers from getting in over their head, it actually crushed the market completely. Buyers, especially first-time home buyers, were still prohibited from getting into the market because of how strong these new rules were. Any home buyer that was looking to get an insured mortgage (less than 20% down) needed to qualify at the bank rate along with the 5-year fixed-rate (the “Stress Test’), which was typically almost double. Hence, you can see how difficult it was to get a mortgage.
Fast forward to today. Look at the chart below. Nearly 40% of all homebuyers in Canada are under the age of 35. Many of these buyers will require an insured mortgage. These buyers will need to pass the Stress Test before being provided with a mortgage to purchase a home.

Now that the government recognizes the importance of this group, they have decided to pull back a bit. They will be lowering the Stress Test in the right direction. Now the Stress Test will be two percentage points above your agreed upon bank rate instead of the 5-year fixed rate. This should lower the overall qualifying Stress Test rate by about a ½ a point. This could provide an extra $50,000 purchasing power on a $700,000 house. While this is a step in the right direction, is it enough?  
The graph below illustrates why young people are not buying homes. 

Nearly 40% of GTA renters under 45 cannot afford a down payment. 20% don’t think they could ever afford or qualify for a mortgage. In the end, over half the people below the age of 35 are limited by mortgage rules. So, I ask once again, is this move to change the Stress Test enough?
Below you will see the final graph illustrating the percent of people thinking of buying in 2020. This number is continuing to drop significantly. Our housing industry is the biggest fuel behind our economy. If people aren’t moving, they aren’t renovating. If they aren’t investing, they aren’t growing their wealth. In essence, they are staying status quo and in nature, there is no status quo – what isn’t growing, is dying.
Is changing the Stress Test rules enough? With interest rate decreases on the horizon, does this do the trick? A lot of this is trying to solve the demand problem. How about providing answers to the supply problem? Perhaps the solution starts with investing outside the cores of cities, moving federal taxpayer dollars to rural markets or provide a greater opportunity in the number of affordable units coming to the market. These are just a few ideas. What are your thoughts?

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JOSHUA CAMPBELL (@knowledgebrkr)
Real Estate Broker
Coldwell Banker The Real Estate Centre, Brokerage
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