New controversial mortgage stress test

The biggest news in real estate this past month is no doubt the controversial mortgage stress test.

It will be aimed at people with heavier debt loads and at least 20% equity. Given where Canada’s home prices and debt levels are, this is easily the most potent mortgage rule change of all time.

It’s like a two-point rate hike: Uninsured borrowers can qualify for a mortgage today at five-year fixed rates as low as 2.97%. At the beginning of next year, that hurdle will soar to almost 5%. Meaning, you could need upward of 20% more income to qualify for the same mortgage that you could get today.

The Office of the Superintendent of Financial Institutions (OSFI) said this change will make sure people can afford much higher rates and it will substantially increase the quality of borrowers at Canada’s banks. OSFI argues that this will insulate our banking system from economic shocks.

In a Globe and Mail article, critics say this new mortgage stress test will push borrowers to riskier lenders, click here to read the article.

Many questions were raised:

  • Whether this was all necessary, given already slowing home prices, provincial rule tightening, rising rates and the fact that uninsured default rates are considerably lower than for people with less than 20% equity.
  • Does growing debt risk in the non-prime mortgage market, combined with home price risk and a potential drop in employment and consumer spending truly lower banks’ risk?

Industry economists like Will Dunning said scores of borrowers will be forced to defer buying, pay higher rates, find a co-borrower and/or put more money down to qualify for a mortgage. Click here to see the video.

OSFI says its responsibility is to keep banks safe and sound. Overly concerning itself with the side effects of its mortgage stress test is not its mandate.

Impact of BC Election on Real Estate

The BC Provincial Election is coming soon on May 9, 2017. In the past the housing market slows during election time because people are uncertain about the economic future of a province because we don’t know which party is going to be elected yet. People tend to want to wait until after the election when a party is firmly in place to make big decisions such as whether to buy or sell real estate.

This year however, we are not seeing a slow down before the provincial election. Contrarily, we are seeing multiple offers everywhere, in both Metro Vancouver and the Fraser Valley. Condos and Townhomes continued to be hot commodities that multiple offers situation is everywhere. If you see a home coming onto the market, it’s usually, open house weekends, taking offers on Monday. Sometimes you see a home sold before the open house even takes place and often it is sold for more than the asking price.

And now single family houses are making a come back. A successful mortgage broker told me, last year, most of the his clients were applying for mortgages to buy condos. This year, half of his clients are still buying condos but half of them are buying single family houses.

Yesterday, I heard the news on TV reporting “Residential property sales in Greater Vancouver declined 25.7% last month.” And the anchor went on to report other news. I found it very misleading and no wonder people were asking why the market is down when you say there are multiple offers everywhere.

You can see the numbers in Vancouver Real Estate Board of Greater Vancouver Stats News. The sales volume (# of sales transaction) has decrease 25.7% last month as compared to April 2016 when the market was at its highest.

But if you kept reading, it also reported that:

  • April sales were 4.8% above the 10-year average for the month.
  • Jill Oudil, Real Estate Board of Greater Vancouver president said. “Demand (for condo and townhouses) has been increasing for months and supply is not keeping pace. This dynamic is causing prices to increase and making multiple offer scenarios the norm.”
  • By property type, the sales-to-active listings ratio (Supply vs Demand) is 26% for single family homes, 58.2% for townhomes, and 82.2% for condominiums. (Generally, analysts say home prices often experience upward pressure when it surpasses 20% over several months.)

The political parties all agree that supply of new homes in B.C. must be significantly increased in order to improve affordability especially entry level or ‘missing middle’ types of homes. All parties have come to different conclusions on how to increase supply, and how to police speculative demand.

Here is a breakdown of party proposals: B.C. Election 2017: Political parties make promises for affordable housing

And issues on real estate speculation that needs to be addressed: Vancouver’s presale condo market reaches fever pitch