With home prices skyrocketing 30-50% or more over the past 365 days in many Southwestern Ontario markets — and homebuyers clamoring for more affordable options — the government has once again stepped in to save the day…
…with a more stringent mortgage stress test.
The newly-revised stress test, which went into effect June 1, requires uninsured buyers (those with more than a 20% down payment) to qualify at a 5.25% rate — 46 basis points higher than the previous benchmark and much higher than the rate you’d negotiate with your lender. The result: reduced purchasing power for homebuyers.
The goal is to prevent buyers from maxing out to ensure they can afford mortgage payments at higher rates tomorrow and, at the same time, curb demand and rising home prices.
But, will it work? Will buyers drop out of the market? Will prices drop dramatically? Luckily, this isn’t our first rodeo. To understand what may happen, let’s review the results of the last two stress tests:
Stress Test #1: Oct 17, 2016
This stress test applied to all insured borrowers (those with less than a 20% down payment) and required them to qualify at the Bank of Canada’s conventional five-year fixed posted rate, which was 4.64% at the time.
As the first major stress test, this was, relatively speaking, the biggest hit to homebuyer purchasing power we’ve seen: for many, a 20% decrease.
But what happened was interesting and, we’d dare say, unintended:
Prices skyrocketed more than ever before through the Spring of 2017.
Why? Canadian homebuyers are resourceful. Many buyers went to the “Bank of Mom and Dad” to get the cash needed to reach the 20% down payment threshold (and avoid the stress test), then proceeded to buy at their max spending potential.
At the same time, we saw a flood of GTA buyers make their way to Waterloo Region where homes were (and still are) much more affordable.
The result: sky-high demand, massive bidding wars, and, of course, rising prices.
Stress Test #2: Jan 1, 2018
After a year of record price gains after the first stress test, the government decided to expand the stress test to buyers with uninsured mortgages (with more than a 20% down payment), effectively closing the “Bank of Mom and Dad” loophole.
Demand continued to be strong and prices continued to rise, albeit at a more typical pace of 3.4%. But, they didn’t drop; the gains made through 2017 were locked in.
Stress Test #3: June 1, 2021
Since the 2018 stress test, prices have skyrocketed. While much of this growth has taken place post-covid, it’s important to note that prices had been rising considerably prior to the pandemic. In Kitchener-Waterloo, for example, the average sale price rose 9% in 2019 alone.
In response to the price growth we’ve experienced over the past year, the government has taken action with a tougher stress test for all homebuyers with an uninsured mortgage.
Will it calm the Waterloo Region market? Will prices drop?
Judging by past results, we can expect a temporary calming as buyers recalibrate and perhaps take a “wait and see” approach.
But as we’ve seen, the last two stress tests have been followed by rising prices which have held long-term. Also, the impact on purchasing power this time around is modest compared to previous iterations and affects a small portion of homebuyers (most buyers have insured mortgages).
Based on past results and the relatively small reduction to purchasing power market-wide, we don’t expect this measure to significantly impact the Waterloo Region market.
The Common Thread
No matter the barriers put in place, one factor has remained constant: the demand for homes in Southwestern Ontario has continued to far outpace supply.
Even with tougher stress tests and rising prices, there are still more than enough buyers able and willing to pay the price of admission. As a result, prices have continued to rise.
While stress tests on the surface aren’t a bad concept (you should always leave wiggle room in your budget), they don’t tend to balance the market.
Until the supply of housing increases to meet demand, we expect prices to continue to rise.