Canada’s bank regulator, the Office of the Superintendent of Financial Institutions (OSFI), is seeking to raise the mortgage qualification bar for Canadian homebuyers.
OSFI is proposing that homebuyers applying for uninsured mortgages will need to qualify at a minimum rate of 5.25%, up 46 basis points from the current minimum qualifying rate of 4.79% set by the Bank of Canada.
This will mainly impact buyers with a down payment greater than or equal to 20% of the cost of the home, effectively reducing their purchasing power by approximately 4-5%.
The proposal is still being debated but expected to take effect on June 1, 2021.
This is being proposed for three reasons:
- To create more of a buffer for homebuyers, ensuring that they will continue to be able to afford their monthly payments if mortgage rates increase
- To protect banks by reducing the likelihood of mortgage defaults (see above)
- To “cool” overheated markets by curbing affordability and, thus, demand
But, will it work? How will this impact buyers, sellers, homeowners, and the Southwestern Ontario market as a whole?
Here are three outcomes we expect:
1. Increased Demand for Homes in Smaller Markets
One thing that’s not changing: buyers have more mobility than ever before due to remote working. Their newfound freedom to pursue more affordable options has been a driver of rising prices in smaller cities and towns.
With big-city homes becoming less affordable with this new stress test, homes in smaller markets stand to become even more attractive.
2. Short-Term Buyer Frenzy
June 1 will be the date circled on the calendar of every homebuyer with a 20% down payment. Looking to max out their affordability and get the best possible home, many will try to buy before the new rules take effect.
For that reason, we’ll likely see some “pull-forward” demand: an uptick in short-term buying activity to beat the deadline.
(Homeowners: if you’ve been thinking about selling your home, this is a great time to talk about your options.)
3. Prices Will Continue to Rise
While this policy will dissuade some homebuyers from making a move, it does not impact the many buyers who qualify for insured mortgages (those with a down payment of less than 20%).
Demand should continue to significantly outpace supply which, typically, leads to rising prices.
The Main Takeaway
We’ve been through this before. In fact, the first versions of these stress tests introduced in 2016 and 2018 had a much greater impact on purchasing power market-wide than the amendment currently under consideration.
Yet, the appetite for homeownership in Southwestern Ontario remained strong — and prices, as we all know, have continued to rise sharply.
This stress test, while indeed creating a bigger hurdle for homebuyers to clear, won’t be enough to change that.
