It’s already tough to purchase a home in Oakville, Burlington, Milton or Halton Hills, what with detached homes typically running buyers an absolute minimum (on average, at least) of $800,000 (most still hover around the $900,000 to $1 million mark), and it looks like it’s getting more difficult for some prospective homeowners.
A recently released report by Mortgage Professionals Canada suggests that up to 18 per cent of prospective homebuyers who can currently afford their preferred purchase would fail a stress test.
For those who are unaware, stress tests–which have been implemented by the federal government as a means of managing household debt–require prospective buyers to qualify at higher rates than what they’ll inevitably end up paying.
While some have praised the tests for helping cool the market (which reached unprecedented highs in 2017), the report argues that the regulations are “unduly suppressing” home sales throughout the country.
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“For potential buyers who are adversely affected by the stress tests, the solutions will usually involve a combination of reducing their expectations (and therefore buying less expensive properties) and secondly, making larger down payments,” the report reads.
As for how much people will have to adjust their expectations, the report says some prospective buyers will qualify for homes that are about $28,750 less than what they can actually afford.
For some, the news isn’t all bad.
The report says that for about 120,000 potential buyers each year, the required adjustments would be relatively small for most.
That said, approximately 30,000 to 40,000 prospective buyers would face larger effects and would need to make considerably larger down payments, which might significantly delay their home ownership dreams (especially when considering the fact that saving up for even a modest down payment can be a challenge at a time when the cost of living has generally outpaced salary growth).
The report estimates that about 100,000 Canadians have been prevented from buying their preferred home as a result of the policies.
“The overriding message in this report is that federal government policies with regard to mortgage lending are unduly suppressing housing activity. Our consumer survey has found that sentiment regarding the housing market has shifted decisively downwards during the past year and a half, reflecting the impacts of increased interest rates and government policies that are making it more difficult for potential homebuyers to obtain the mortgage financing they need.”
The organization suggests the stress tests could have an adverse effect on the overall economy.
“The weakening of housing markets will increasingly impair the broader economy. In this report, it is estimated that during the coming three years, job creation will be 200,000 less than it would otherwise be, as a result of these policies: they are unnecessarily adding to economic risks within Canada,” the report reads.
The report does point out that areas with excessively hot housing markets, such as Toronto and Vancouver and their respective satellite cities, could benefit from tighter controls on housing.
That said, it questions whether the cooling measures have prompted change too abruptly.
“In a few places, housing activity had been excessively robust, and a slowdown is a welcome change. Toronto and Vancouver (and their surrounding areas) are obvious cases where there had been excessive strength,” the report reads.
“The weakened market conditions in Toronto and Vancouver have been seen as a favourable change, although it remains to be seen whether those slowdowns have been too sharp.”
But while many Toronto, GTA and Vancouver residents have been calling for cooling measures for sometime, similar calls for action haven’t been quite so pronounced throughout the rest of the country where, the report suggests, major lending reforms aren’t necessary.
“There has been considerably less discussion about changing housing market conditions for other areas of Canada, where market conditions had been roughly in balance, with moderate price growth and where potential homebuyers felt much less stress,” the report reads.
“Now, with softening housing market trends in many of these communities, the housing market transitions are creating increased stress for potential sellers, who are finding it more difficult to sell their properties. We are not yet seeing notable price reductions in these housing markets, but there are many instances where weak demand is leading to prices that are flat or eroding gradually.”
While the report notes that the housing market hasn’t been severely impacted yet (saying that housing markets across the country are currently “behaving as they should”), it suggests that long-term damage is still possible.
“… Market trends have been sharply disrupted by the mortgage stress tests that are now required for most new mortgages. Due to the stress tests, homebuying activity has slowed sharply compared to what should be happening.”
According to the report, the homeownership rate has fallen in Canada, from 69.0% in 2011 to 67.8% in 2016.
The report argues that the drop is largely due to the increasing difficulty of saving for down payments, and suggests the stress tests will exacerbate the problem.
“The additional challenges posed by the stress tests will add to the downward pressure on the ownership rate. Historically in Canada, over the course of a lifetime it has been advantageous to own rather than rent. There is no reason to believe that has changed. Therefore, the mortgage stress tests, by suppressing home ownership, are adding to the financial stresses that are and will be experienced by Canada’s younger generations.”
The report also says that prospective homebuyers have been discouraged by stress tests, adding that 32 per cent of those surveyed expect “significant negative impacts on their ability to buy a home in their preferred neighbourhood. Thirty-nine per cent of respondents expect a moderate impact, and 29 per cent expect a negligible impact.
Prospective homeowners who do not currently own real estate are more concerned, with 54 per cent expecting the stress tests to negatively impact them.
According to the report, resale activity has fallen 12.5 per cent year-over-year in Canada. The report attributes the decrease to small rises in mortgage interest rates, provincial government policies (such as the Fair Housing Plan in Ontario) and difficulty obtaining financing.
Have stress tests discouraged you from purchasing a home in Halton?