Homebuyers entering in the Canadian real estate market are facing a slightly bigger obstacle starting today, with the Office of the Superintendent of Financial Institutions (OSFI) implementing a higher threshold for the mortgage stress test. Under the new rules, the minimum qualifying rate for uninsured mortgages – those where buyers have a down payment of 20 per cent or more – is either the mortgage rate offered by the lender plus two per cent, or 5.25 per cent, whichever is greater.
The change was prompted by a number of challenges within the Canadian real estate market, such as high debt levels, rising prices, low supply and bidding wars.
“In a complicated and sometimes volatile housing market, the need for sound mortgage underwriting cannot be underestimated. The rate in place as of June 1, 2021 will help support financial resilience should economic circumstances change, while our commitment to review the qualifying rate at least annually will contribute to continued confidence in the Canadian financial system,” said OSFI’s Ben Gully, Assistant Superintendent, Regulation.
Will the Mortgage Stress Test Cool the Canadian Housing Market?
While some have indicated that the higher threshold may cool the hot Canadian real estate market, industry insiders have their doubts.
“Given the small increase in the qualifying rate that will come into effect under the new mortgage stress test rules, we don’t anticipate any significant long-term impacts to the housing market. In the short-term, this may work to slightly calm recently hot activity, but the affordability challenges seen in many Canadian cities will remain,” according to a joint statement by Christopher Alexander, Chief Strategy Officer and Executive Vice President and RE/MAX of Ontario-Atlantic Canada, and Elton Ash, Regional Executive Vice President, RE/MAX of Western Canada.
The first iteration of the OSFI mortgage stress test took effect in 2016 and applied to insured mortgages, as a means of cooling the housing market. Then in 2018, it was expanded to all mortgage borrowers, to ensure their ability to service their mortgage debt, even if interest rates rose by a couple of percentage points. The mortgage tress test qualifying rate has undergone some changes over the years. Prior to June 1, the bar was set at 4.79 per cent.
“As proponents of buyers purchasing within their means and avoiding financial infeasibility, and in also understanding the affordability crisis spanning the Canadian real estate market, we recommend that along with short-term measures, including the stress test adjustment, larger-scale solutions to housing affordability are also addressed,” said Alexander and Ash. “As the historically low interest rates eventually begin to creep up over time, these upcoming changes may need to be eased once again, to match current economic conditions.”
The OSFI will be reviewing the stress test annually, at minimum, to ensure its relevance under changing market conditions.
“While this happens, we’d also hope that regulators are simultaneously working on a long-term national housing strategy that increases supply and allows Canadians to be able to successfully enter the market.”
Canadian Housing Market Needs More Supply
Affordability has been an ongoing issue within the Canadian housing market, with government-imposed cooling measures only providing temporary relief in the past. In fact, these have had unintended consequences and have actually exacerbated the current predicament. In many ways, Canadian real estate is still reeling from the pent-up housing demand of 2017, when cooling measures such as the foreign buyer’s tax and the early mortgage stress test pushed many homebuyers to the sidelines. People paused their purchasing plans, and over the years many have saved their money with the aim of getting back in the market at a later date.
Yes, we have a problem given the unprecedented levels of activity in the Canadian real estate market ─ from soaring price increases from coast to coast spurred-on by overwhelming demand to profound challenges in housing affordability. While COVID-19 has made this significantly more pronounced, the issues facing the Canadian housing market were brewing long before the pandemic struck.
Alexander and Ash have held that long-term solutions to the affordability crisis include increasing supply in the Canadian housing market to reach the majority of homebuyers, making all purchases conditional on financing to reduce financial overextension of buyers, and implementing regulations concerning listing price thresholds, will we find the answer to cooling the exuberance enveloping Canadian real estate.