Economics News

The Problem with the Mortgage Stress Test

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“The stress tests are great,” Pasalis says of the measure which requires mortgage applicants to qualify for their loans at a higher interest rate than they are signing on for.

As he sees it, there’s just one problem. “The problem is, it was probably too much, too quick.”

The new mortgage rules have come at a time when mortgage rates are on the rise. Pasalis, president of the Realosophy brokerage, notes how the Bank of Canada has hiked the overnight rate five times over the past six quarters. That, together with the stress testing, has added 300 basis points to the qualifying rate for homebuyers.

Pasalis highlights how much the lending landscape in Canada has changed for borrowers over the past 10 years.

“Policymakers thought extending credit to households was a great idea,” says Pasalis, noting that a decade ago consumers had access to 40-year amortizations.

Today, amortizations are capped at 25 years and a stress test has come with higher interest rates.

“I think it’s a lot in a relatively short period of time, especially over the past 18 months, to introduce these measures, and I think you can’t sort of shift the underlying philosophy of how you’re lending to consumers significantly without there being consequences,” says Pasalis.

The stress test has been commonly cited as one of the main causes of the Canadian housing market cooldown that played out last year. Experts have estimated that the stress test eats away at a mortgage applicant’s buying power by about 20 percent.

In commentary posted to Twitter, Pasalis speculated that policymakers may ease stress testing if the Canadian housing market continues on its downward trajectory this year.

Already, he suggests, a significant number of borrowers are turning to private lenders, who typically charge higher interest rates but are not mandated to impose a stress test. “As a result, they are paying much higher rates for their debt, spending less, [and] saving less.”

Source: Mortgage Architects

Home Prices Continue to Soften Over Next Two Years

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The next two years in Metro Vancouver real estate will continue to see lower sales and higher inventories of homes available for purchase than in recent years, according to a forecast released November 6 by the Canada Mortgage and Housing Corporation (CMHC).

CMHC said in its report, “While existing home sales are expected to rebound in 2019 from the trough in 2018 in order to be more in line with the region’s growing population, resales will remain below the levels seen in 2015-2017.”

CMHC expects Metro Vancouver MLS resales to drop from the 50,033 units sold in 2017 to just 35,500-37,400 sales this year. Sales are then expect to recover somewhat in 2019 and 2020 to somewhere in the early to mid 40,000s range.

Home prices, however, are expected to head in the opposite direction. The agency is forecasting the average Metro Vancouver MLS home sale price to be between $940K and $980K this year (up from 2017’s $934,977). It is then expected to drop in 2019 to between $847 and $939K, and then slide to somewhere between $800,000 and $918,000 in 2020 (see graph below).

CMHC hmo van prices graph nov 2018
Source: CMHC, REBGV, FVREB

The CMHC said that a major factor in falling prices is rising interest rates making mortgage payments less affordable. It said, “Rising mortgage rates since May 2017 and stricter borrowing requirements are also having an impact on potential home buyers through two channels; 1) rising rates increase the carrying cost of holding a mortgage and; 2) rising rates have an impact on borrowing capacity.” This could mean falling home prices don’t necessarily equate to better housing affordability.

The agency also predicted the next two years for the rental market in Metro Vancouver. The report said, “The rental market is expected to remain tight across the region, average rents will continue increasing faster than inflation. The vacancy rate is expected to rise slightly; however, it will remain low in absolute terms, reflecting the strong demand for rental housing in the region.”

Source: Vancouver Courier

The Interest Rate Hike and What It Means For Canada Housing

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As was widely expected, the Bank of Canada (BoC) hiked the overnight rate to 1.75 percent.

Higher interest rates inevitably lead to higher mortgage rates, which means industry players keep a close eye on the BoC’s hikes, and how they could affect Canada’s housing market.

Rising rates could spook would-be buyers, placing downward pressure on the market. And, according to CIBC economist Avery Shenfeld, it looks like the Bank might be hiking rates at a faster pace heading into 2019.

“The tone [of the Bank’s announcement] was more hawkish than we expected, dropping the reference to “gradual” for hikes ahead (which markets will see as leaving the door open for two in a row, meaning a hike in December), and asserting that rates will have to keep climbing to “neutral”, which the Bank has estimated as near 3 percent,” he writes, in his most recent note.

Most economists agree that the rising-rate environment has had a positive impact on the Canadian housing market, helping to take it from bubble territory in 2017 to today’s more balanced conditions.

“Canada’s previously hot housing market and robust household borrowing trends have given way to much calmer activity in 2018, and that’s a good thing,” writes Douglas Porter, chief economist at BMO, in a recent note.

Porter notes that the country’s hottest markets, Vancouver and Toronto, now have price gains of just above 2 percent. But, he’s also quick to add that if rates rise too quickly, it could have a negative impact on housing activity in 2019.

“Still, there are plenty of warnings about the past build-up in debt and the vulnerability of the household sector to further rate hikes, a key reason why the Bank of Canada is likely to remain on a gradual tightening path,” writes Porter.

Source: Livabl