The real estate market here – and across the country – has been ablaze. In our region, March marked the seventh month in a row for record-setting sales. One more month and we’ll break the same streak last set in 2015/2016.
Home prices are through the roof.
The government has been under pressure to cool the market and Canada’s bank regulator has just made the first step. The Office of the Superintendent of Financial Institutions (OSFI) has proposed changes to the mortgage stress test for uninsured mortgages to make it more difficult for borrowers to qualify. If approved, it will go into effect June 1st.
And according to BCREA’s Chief Economist this isn’t likely the only intervention we will see.
To understand the impact of all of this on your business, your clients, and the Fraser Valley market, we reached out to Brendon Ogmundson for another exclusive one-on-one.
Q: Did OSFI’s announcement surprise you?
It was not unexpected. Household debt is of concern to the government and when you see the price of a typical detached home in the Fraser Valley and elsewhere increase by 25 per cent year-over-year, regulatory intervention was bound to happen, it was a matter of what and when.
Q: What is the proposed change?
OFSI is proposing that the B20 mortgage stress test be strengthened effective June 1st of this year. Currently, the existing qualifying rate for a conventional mortgage is 4.79 per cent and if this change goes ahead, it will set the minimum qualifying rate to 5.25 per cent.
“[A tougher stress test] is unlikely to have much of an impact on the majority of buyers.”
Q: A one-time jump of almost half a per cent seems like a lot, what does this change mean for most home buyers?
Actually, not much. The increase from 4.79 per cent to 5.25 per cent only represents about a 4 to 5 per cent reduction in purchasing power. So, for example, instead of qualifying for a million-dollar home, a buyer qualifies for a $950,000 home. This could make a difference for buyers right at the margin, but it is unlikely to have much of an impact on the majority of buyers.
Q: What will this change do to the housing market in the short-term? And in the long-term?
If approved, in the short-term, ironically, we could see a further ramp-up in market activity between now and June as buyers strive to get ahead of the new qualifying rate.
It’s important for REALTORS® and their clients to understand that this is a fairly minor tweak to an already quite stringent stress test. With market rates hovering between 1.4 per cent for variable rates and 2.14 per cent for a 5-year fixed mortgage, borrowers already had to qualify at 250 to 340 basis points over their contract rate.
Once this bolstered stress test is in place, we may see some moderation in home sales, but it will likely be one of several factors that we will see cooling the market in the latter half of 2021.
What will likely have more of an impact will be rising mortgage rates combined with stretched affordability due to rapidly rising prices. Over the longer term, a tougher stress test will further tighten lending standards in Canada, although OSFI did indicate that the minimum qualifying rate would be re-visited annually and re-calibrated if needed.
Prepare your clients: More measures to cool the market likely to come.
Q: There’s also been talk of other government measures, like lowering debt to income ratios or reducing the loan to value limits. Do you see either of those on the horizon as well?
Because this change to the stress test is fairly insignificant, I expect that it will be paired with other cooling measures. What those might be is hard to say.
Raising minimum down payments would be fairly significant and would primarily impact first-time homebuyers who the government is simultaneously trying to help with a re-vamped first-time homebuyer incentive.
We could see a National Speculation Tax, which the government hinted at earlier this year. That would have little impact here in BC because we already have the Speculation and Vacancy Tax.
Q: We saw record-breaking new listings in March, how many more months of that do we need, coupled with this regulatory change, to stem price increases and calm the market?
It is very encouraging that new listings are responding to high prices and are finally picking up after being depressed by the pandemic.
However, the Fraser Valley Board area needs between 6,000 and 8,000 active listings for a balanced market when home sales are at normal, long-term averages. At around 5,000 listings currently, and with sales that are well above average, it will take quite some time, and a combination of slowing demand and strong listings, to get back to balance.
Q: What role do you see the pandemic and vaccination roll-out continuing to play in the housing market?
An end to the pandemic is going to provide an enormous boost to the BC economy, especially to parts of the service sector that have been most adversely affected.
The real estate industry and the housing market has led the recovery and while home sales may cool from their current frenetic pace, strong growth in employment and incomes will continue to support a high level of housing market activity post-pandemic.
As always, thank you, Brendon! For more market intel from Brendon Ogmundson, Senior Economist, BCREA, head to www.bcrea.bc.ca and keep tabs on their COVID-19 Reopening Dashboard.
In addition to the recent notification from OSFI, the Real Estate Council of BC and the Office of the Superintendent of Real Estate issued a joint press release on April 9, urging buyers to do their research before making an offer. For more details, click here.