The stress test continues to be the focus of much research, with new data released recently on the full extent of its impacts on the housing market.
We’ve summarized the latest findings, which look at the stress test’s impacts on home sales and prices over the past year, as well as the current state of consumer awareness.
TD Says 40,000 Buyers Sidelined by B-20
New research from TD Economics estimates that the B-20 regulation (stress test) resulted in 40,000 fewer home sales over the course of 2018, with “disproportionate impacts on the overvalued Toronto and Vancouver markets and on first-time homebuyers.”
The report’s authors note it also impacted the supply side of the equation, with fewer existing homes on the market and fewer new units in the pipeline, which has put more strain on “already-tight” rental supply as would-be buyers were forced to continue renting.
“For the most part, the B-20 rules have contributed to bringing down housing activity to a more sustainable level,” reads the report. “However, developments should be closely monitored. There is certainly scope to tweak the guidelines if circumstances change and/or housing markets undershoot expectations.”
It adds that if B-20 was removed immediately, it would result in home sales rising 15% by 2020 (seven percentage points above current projections), and prices rising 10% (six percentage points above current projections).
Mortgage Professionals Canada CEO Paul Taylor said he agrees with the conclusion that prices would rise with the complete removal of the stress test, but noted that’s not what the association is advocating for. Rather, it’s proposing an easing of the stress test to 75 bps (from 200 bps) to help those who are having difficulty entering the housing market. “We’re not trying to add fuel to a fire, we just want to stop pouring quite so much water on it,” he told the Globe and Mail.
Bank of Canada Weighs in on Stress Test Impacts
The Bank of Canada recently released its own research into the effects of the stress test, finding that the new rules were responsible only for a small part of the decline in home sales.
Instead, the BoC says the bulk of the drop was caused by “deteriorating affordability” and a “dissipation of previous froth” in key markets in Ontario and B.C.
“The direct impact of recent mortgage rule changes, in contrast, is estimated to be relatively small,” the report reads.
“Of course, the housing market is currently in uncharted territory,” the report adds. “Several policy measures are working their way through the system within the context of record household indebtedness and elevated housing imbalances.”
Majority of Canadians Don’t Understand the Stress Test
Despite the stress test having been in effect for nearly a year and a half, many Canadians admit to not understanding the new rules and how they affect their finances.
A new survey from TD Bank found 43% of Canadians aren’t confident in their knowledge on the stress test, while a majority, 59%, said they don’t understand how the rules affect them.
This reinforces the value mortgage brokers can bring to the table when it comes to helping borrowers navigate the new regulatory environment.
Other findings from the survey include:
- 81% of respondents don’t understand how a potential rise in mortgage rates will affect them financially
- 31% are not confident in their understanding of mortgage prepayment rules
- 28% do not understand the difference between a pre-approval and pre-qualification
Stress Test Blamed for 24-Year Low in Vancouver Home Sales
Home sales in Vancouver continued to fall in April, reaching a 24-year low, according to the Real Estate Board of Greater Vancouver (REBGV).
Overall sales were down 29.1% from a year ago, while prices are down 8.5%. The benchmark price for all property types has now fallen for 11 consecutive months, to $1,008,400.
Ashley Smith, REBGV president, said the downward trend is being driven by reduced demand rather than increased supply.
“The federal government’s mortgage stress test has reduced buyers’ purchasing power by about 20%, which is causing people at the entry-level side of the market to struggle to secure financing,” she said. “Suppressing housing activity through government policy not only reduces home sales, it harms the job market, economic growth and creates pent-up demand.”
And in other news…
More Details on First-Time Home Buyer Incentive
But CMHC CEO Evan Siddall confirmed a few more details last week during an interview with Evan Solomon (first reported on RateSpy.com).
Here are some of the points Siddall confirmed in that interview:
- The maximum home price that would qualify under the FTHBI ranges from $505,000 to $580,000, and is based on a combination of the down payment and whether it’s a new or existing home.
- The program provides down payment assistance of up to 5% for existing homes or 10% for new builds, with CMHC then sharing proportionately in the future gains or losses. “We buy your house with you and then get out of your way…We just share in the gains or losses in the home you buy,” Siddall said.
- For example, on a $500,000 house, the 10% down payment assistance would be $50,000. If the value of the home doubles, you then owe CMHC $100,000 (for its 10% share of your million-dollar house), Siddall said, noting the reverse is true if your property declines in value.
- If the homeowner defaulted on the loan, the lender would get paid before CMHC.
- About 100,000 people are expected to participate in the program.
- Asked if CMHC would benefit from appreciation due to renovations performed by the homeowner, Siddall said that’s something they’re “still working out.”