Canadian real estate buyers with large down payments, will now be stress tested at banks. Numbers obtained from the Bank of Canada (BoC) show this will have a “significant” impact on buyers that are stretched thin. Yes, that means absolutely nothing to most people. To give a better sense of what it means to the market, we applied these stats to real mortgage numbers. This gives us an idea of what “significant” means. A pool of buyers roughly the size of a year worth of sales in Toronto will be affected. More interesting is what happens if the rules don’t cool buying activity, it would make housing less affordable in the near term.
You’re Going To Need To Know This First
First, there’s two industry terms you’ll need to understand for any of this to make sense the new low-ratio mortgage stress test, and loan-to-income ratio. First off, a low-ratio mortgage is one where the buyer makes a hefty down payment of more than 20%. A low-ratio mortgage stress test is a new check for these borrowers. It makes sure that they can continue to pay their mortgage, even if their rate rises 200 bps. It does ensure high mortgage rates won’t be a surprise, but it also reduces your buying power by over 20%. Yeah, bank regulators are being a total mom here, but it’s for your own good. You think not owning is stressful? Then you are unprepared for the reality of owning and not being able to afford the payments.
The loan-to-income ratio is the size of your loan, relative to the annual income of your household. Financial experts in the US, where mortgage rates are much lower, say 200 – 400% is where you should be. That means, if your household makes $100,000, your home should be somewhere around $200,000 to $400,000. Not a lot of Canadians have heard of this rule, and some people even say it’s a little dated… mostly real estate agents and mortgage brokers. We won’t be debating that today, but you do need to know what the term means.
Over 81,950 Mortgages Last Year Would Have Failed The Stress Test
BoC estimates that a significant number of low-ratio mortgages with high loan-to-income ratios would not have passed a stress test. Looking over a year worth of mortgages, ending on June 2017, they determined 12.37% of low-ratio mortgages would not have been approved. Shock… not really. It’s actually a really ambiguous statement, without a whole lot of meaning. So let’s give it a little context.
Source: Regulatory filings of Canadian banks and Bank of Canada calculations. Better Dwelling.
The vast majority of mortgages in Canada are low-ratio mortgages. This makes the impact much greater than stress testing high-ratio borrowers. During the period the BoC studied, there was an estimated 662,496 low-ratio mortgage originations. At 12.37%, that means about 81,950 would not have qualified. That’s a huge number, but distribution is a key that needs a better understanding. Higher loan-to-income ratios are more common in markets like Toronto, and Vancouver. The impact to these regions would be much higher than say… Quebec City.
Source: Regulatory filings of Canadian banks, BoC, and Better Dwelling calculations.
One Unintended Consequence They Probably Didn’t Model
Most of these buyers that would fail the stress test, would either delay their purchase or get something less expensive. Delaying their purchase while inventory is climbing in Toronto or Vancouver, could lead to declining prices. This has a domino effect, placing less urgency on other buyers, since they aren’t so inclined to panic buy. That’s likely the intended goal of the government – to reduce prices, by reducing demand.
If people “choose” to buy a more affordable home instead, that increases competition for lower priced segments (like condos). The increased competition would bring the floor of prices higher, actually hurting affordability. This drives even more risk into speculating on lower prices units. It also has the potential to create a condo bubble.
At some point the cost of lower priced segments like condos, no longer make sense. Eventually the market rejects it, and prices come down across the board. That’s what would have happened without any stress test though.
Stress testing low-ratio mortgages will have a huge impact, but where is still up for debate. If it reduces demand while inventory continues to climb, we have a broad market decline of prices. If demand stays similar, as the real estate industry is anticipating, buyers will compete for similar segments of housing. This would create a bubble in the condo market, making things even worse. So which one is it, industry? Will demand taper and prices drop, or do we have a condo bubble getting ready to inflate?
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Thanks for this, a very good summary of the impact. Most people are unaware of how big of an issue B-20 mortgage stress testing is. The media keeps running pieces where they show a mortgage broker explaining it’s no big deal.
Meanwhile, my office is receiving report after report on the potential impact, and the shift this means for the Canadian economy. People need to look at this way, when a stock losses 10% of revenue, it PLUMMETS.
Good information. Regulations like these in the housing market usually don’t address any real supply issues, and results in other issues popping up. In this case, it appears that the government has “saved” expensive housing, and may have put more strain on affordable housing.
Some agents are denying this, and pretending nothing changes. I’m sending this to all of my clients. Good agents don’t focus on selling now, they focus on helping clients buy at the right time. Right after regulation changes is definitely the wrong time. You’re better off paying 5% more later, than losing 10% of your equity on a rushed decision.
Agreed. I sent all of my clients actively looking this article. It’s better to have a client buy 6 – 8 months later, when they’re sure, than it is to have one curse your name as a cheat because you didn’t properly inform them.
It’s not a secret. When a certain notable mortgage broker became a renter, I started to think it’s time to just pause. 80,000 people may not be leaving the market, but they’re going to take a lot longer to figure out what they can afford. The days of easy credit are gone, and the market will have to adjust for that. Hopefully it’s nothing!
The stress test is non-sense. More people will be hurt by stress testing than not. What they should have done is made the banks responsible for their own risk, instead of putting it on taxpayers.
what a naive statement. Sorry. Bank are behind alm this mess and will never expose their back. Gov is just reactive to whatever banks do. The primary target of the stress test is developers . Not consumers.
You really think there’s any such thing as self-regulation by capitalism-focused entities? They’re just in it to make money regardless of where the pendulum swings.
Once again you guys are the best source of real information in the Canadian Real Estate space. Thanks and keep the great work up!
Actually I would argue the stress test will knock out demand in the entry level segment of Toronto and van, think first time buyer,(condos) because semi and detach is already out of reach, even before stress test.
That’s why demand and price for condos went up, because everything else was unaffordable otherwise.
Those in the market with detach or semi have a lot of equity, and not affected as much as first time buyer who was never in market.
You got it! I think the same way. Detached in 1+ mill, has seen little to no activity since around November of 2016. A lot of it is due to regulation, which targets shadow flipping, and naturally. Prices have reached a point where banks are simply not lending at those valuations. Now, we are seeing the same thing happening in the condo market. 2 bedroom segment used to be the talk of the town in 2016 and early 2017. Now it’s 1 bedroom segment which has already been loosing steam in the high 600 range. What’s next, bachelor units (400sq) and less? It comes down to demand. And today, demand goes where credit flows.
Excellent analysis as usual. Though I have to say that if one reads this article side by side with the numbers of condo supply hitting the market over the coming years and and tops it up with the Canadian household debt figures, the enigma of what’s going to happen kind of disappears.
Unbelievable that the government would know what these numbers look like, and went ahead with it. Devaluing the majority of people’s assets, to win votes from people that aren’t old enough to buy homes, is just irresponsible.
Hello, you are new here. Please leave politics at the door; the issue with housing impacts us all.
And what would you propose my friend? Do nothing? Assume housing perpetually appreciates so don’t worry? Maybe we should implement a $50 minimum wage? Oh, I know we need to lower interest rates to zero? Better yet, kick out those nasty foreign buyers. Bring back jobs to canada and away from ‘the chinese’, MCGA baby!
If you are naive, that’s ok. If you are a troll…well, see you tomorrow. Happy doing battle with you.
This is actually a very unpopular decision by the government. Canada’s home ownership rate is 70%. If this were about votes, they would do everything in their power to push house prices higher. Forcing asset prices down is NEVER a vote winner. Your theory is DOA.
A) This stress test has absolutely nothing to do with currying favour from any demographic group. It’s a measure to save people from themselves.
B) The value of an asset is established at SALE. Those holding properties that engage in buying or borrowing based on the net-worth they have forget they would need to sell their home to realize its cash value. If you don’t like the price you can get for the sale, don’t sell. If you are in a position where you are forced to sell due to financial strain, then you’ll have to live with it; knowing there’s a very likely chance you got into the mess you’re in because things like this stress test never existed before.
C) Who exactly isn’t “old enough” to buy? What exactly does that even mean? Are you trying to say that the housing affordability issue among millennials is because we are too young? My parents bought their second home around my age by pooling their incomes. My wife and I now earn more (in real dollar terms) now than they did at our age, and the value of a comparable property in their location has gone up 400%. But we’re too young…
You simply are not qualified to bandy about the term “responsibility” given the way you appear to understand these issues.
It’s nonsense to think that people will start selling their homes for less than they paid. Would you? No. Then why would you expect prices to decline?
Attaboy! You teach those buyers a lesson… In case you have not noticed, prices have been declining over the last half a year and have been quite successful at that.
If it does not give you some clues, check the historic price charts for any asset. I don’t mean to spoil it but there is none to my knowledge that shows the price always going up. Ups are followed by downs, which means that someone sells at a loss.
And now the specuvestors who bought into the myth that Tor/Van are built on ItAlwaysGoesUp™ land are about to get some Economics 101 crash course. The bonus material will cover the topic of holding highly leveraged illiquid assets in bear markets.
It does not make me happy to write this at all but what were you really expected? This is a rhetorical question.
You are too kind MH.
David, the big boys are talking. Go get your juice box and toss on some Paw Patrol. Once the dust settles, your mommy will put your helmet on and let you go play. Byyyeeeee!!
I tend to agree with your sentiment as well as expectation of the market. Obviously David A. is lacking in knowledge of panic buying, panic selling and underwater mortgages.
However the personal insults toward someone with an opposing view is not productive. Especially considering we are all speculating until something happens.
MH said all that needed to be said. Let it rest for the good of the community.
Yeah, I have a bit of a headache. Probably should’ve lubed up that response a bit.
My issue with his comment is I cannot discern whether young David is inept, naive or far worse, trolling. Unfortunately, passively worded comments based on a simplistic ‘makes sense’ rationale and with a question at the end is textbook subversion. The comment is digestible, seems right based on commonly held ‘belief’ and initiates deeper cognition, vs a statement, due to the question at the end. Someone may actually ‘agree’ with his comment…and I can be a bit of a prick, you should see me at church.
I don’t know if youre really young or really dumb, but when debt ridden home owners can’t pay their bills, they sell their homes. And when you’re selling in desperate times, you don’t get to be choosy about price, when the bank forecloses, you don’t get a say at all.
We know Canadians are in debt, we know Canadians are refinancing and taking out HELOC’s at alarming rates, and we know Canadians borrowed their down-payments just to get into homes. BoC is going to raise rates, and that is going to kick our housing market right in the groin. And those over-leaveraged “homeowners” will be selling for whatever they can get.
And oh yeah, buyers will be offering less, thanks to the new rules. So the choice will be to sell quickly to cut your losses, or sit and wait and hope you get more than you paid, all the while making debt payments.
Good luck, hope you have your debt paid down!!
When house flippers holding few units and cannot afford their mortgage, they will need to reduce their price to get out form the market or bank will do that for them. Never heard of foreclosure sale?
Good comment but you’ve highlighted the problem. The speculators who helped get us to this point will be long gone and don’t care about affording a mortgage. They bought their donut at $1 and sold for $3 while everyone was begging/borrowing/stealing to pay $4. Now it’s come down to $3.50. Who’s gonna hurt? Everyday Canadians who thought they would play with real estate investment or those who took debt out to fuel the boom. Anyone who bought just needs to wait it out but not before the boomers begin dumping assets…oh sweet lord that is going to be fizucked.
Not everybody needs to sell their house at a loss, nor do they need to sell their home at all if they don’t wish to.
The problem is that prices are set by the margins. Once a few people need to sell, no buyer will ever be willing to pay more for less until a new cohort of buyers establish “support levels” by demonstrating they are willing to buy enough of the asset at the new price that others can realistically guess that prices won’t fall much more from there.
It only takes a few sales to establish this trend. Look at early in 2017. The FOMO was cultivated by such constrained supply that every new sale set a new benchmark, and because so few homes went for sale everybody had to do whatever they could to buy one.
Now that the market is flooded with listings, it only takes a few to capitulate to a low-ball offer to set the new price.
well said sir.
You are right David. No one would like to sell for less.
Thank you Bluetheimpala on you comment to poor David. I L’dMFAO!!
Could not have said it better!!!
9 Chipstead Rd, Toronto
Purchased May 2016 for $2,730,000 Sold last week $2,270,000
This guy lost almost $750,000 with taxes and real estate fees.
15 Berkindale Dr, Toronto
Purchased March 2017 for $4,020,000 November 2017 $3,230,000
This guy lost ONE MILLION DOLLARS with taxes and real estate fees.
These guys will in an educated area and knew when to cut their losses.
95% of EVERY GTA detached property bought and sold in the past 14 months lost BIG!
Information will bring down this market, the revolution will be televised.
Vive la resistance. BD4L
If you bought over the summer of 2017, you have not lost anything. That’s when prices were at their lowest.
Fake news , Dennis. False numbers. Entirely made up.
Seriously, I was about to comment on the fact that the second round meant missed commissions on up to a million dollars in sales.
But then I realized that commissions were paid on $5 million (first case) and $7 million second case in about a year on these properties. Even with lower prices, property selling in a year or less is STILL bringing in hefty double-dip commissions, second time around.
For every buyer that gets bumped by the new rules from a townhouse into a condo, there should also be an equivalent buyer (or more actually assuming there are more people in the lower income brackets) who get bumped from a $400,000 condo to a $300,000 condo (IE. bumped out of the market).
I don’t see how this rule places any upward pressure on condo prices unless someone has data that shows condo buyers typically buy well below their maximum budget (in comparison to other property type buyers).
Assuming condo buyers on average have the same LTV as townhome, semi, and detached buyers. Then just as many condo buyers should be eliminated from the market as there are people who have their buying power reduced to a condo.
Excellent analysis. And mostly agree, except condo market concern is overblown and even unnatural.
Where I live, detached home prices doubled (100% increase) in the last 3 years. Condo/Townhouse prices only increase by around 80% during the same period. So there is a 20% gap between the two segments. If I expand the period to 10 years, the gap roughly doubles! That means, stress test or not, the market equilibrium has not been realized yet, and the market won’t stabilize until it reaches equilibrium. In other words, either detached home prices have to come down by 20% or condo prices go up by another 20%.
Before the stress test, the market equilibrium would have been reached when condo values gain another 20% while detached home values stagnate. What the stress test will do is to bring down the market equilibrium near where the condo market is today. So it is likely that while condo prices will gain little under the stress test, detached home market will retreat anywhere between 10% to 20%.
My conclusion is that the while detached home prices will retreat by 10~15%, condo prices will appreciate by another 5% as a result of increased competition, eventually stabilizing by the end of the year. The following years will resemble that of 1990’s for sometime as a result of rising interest rates.
The stress test the best thing that the federal government could do.
Really good POV Jim, I need to crunch some numbers because I believe the condo market is maxed out. The December frenzy was off the chart with many downtown markets hitting $900-$1000sqft…I know of a 450 square foot condo that went for over $500K. $700K for around $680K.
Excellent analysis as always. And thank you for providing some real objective information on the Canadian market. I understand you cover, mostly, Toronto and Vancouver, and we are ‘told’ there is no issue in other markets, but my ‘superficial’ observation (since I have no access tostatistics), is that the same is happening in other markets. I live in Ottawa, and have been looking to buy a house, but have no confidence, from observing how some realtors behave, and the numbers of ‘flippers’ around. Do you think you may cover the Ottawa market in the near future?
I’m in Ottawa and follow the market. I think it depends on the neighborhood and the house. We recently sold in a “hot” neighborhood and bought in one that we thought was undervalued (much nicer house, same price). The realtors were definitely pushing the “hot” neighborhood and acted like we were crazy to consider buying anywhere else. In Ottawa it seems to me that realtors have their neighborhoods/pricepoints and really try to steer everyone to what they know/are pushing.
Ask a realtor to give you access to the portal which is an account on mls where you can save listings and see what homes are selling for. Once you start seeing what sells for over asking v. under asking you’ll have a better sense of the market.
I think Ottawa prices will remain steady. The rapid climb in West Centretown/Hintonburg/Westboro seems to be over and I think any increases will just be in line with normal growth. Kanata is likely to hold value because there are jobs there but Orleans will be flat or decrease a bit because there aren’t as many jobs and it’s a long commute.
Overall, I don’t think most homeowners will lose money if they try to sell in 5 years (homes bought in winter 2017 excepted) but definitely look at it as a place to live and not as an investment.
it appears the average 416 condo average keeps going down on zolo..it peeked in April about 580k and now 525k
No saving grace here. I expect the infamous 20% gain to be washed away once impact of stress test occurs.
Prices always decrease from the spring market to the frigid winter market. It happens every single year.
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