Buying a home has been a daunting prospect for many people for decades, and particularly so these days given the projections of just how extensively you’re going to stretch yourself to afford a home in Canada’s most popular and hotly-contested metro areas. Now, however, it’s not only a daunting prospect but increasingly an impossible one for many would-be buyers given the new mortgage qualification standards set to come into effect in early 2018.
Here at Real Estate Leads, we’re pleased with how our online real estate lead generation system has been so well received by realtors across Canada. We also enjoy discussing how certain trends in the industry have the potential to weigh in with the livelihood of realtors like you, as well as affect the prosperity of the clients that are so essential to the wellbeing of your business.
This is most certainly one of them, as it means that fewer households than ever before we’ll be deemed to be worthy of lending to purchase a home. Let’s have a look.
West Coast Prospective Buyers Bearing the Brunt
Most notably it’s Vancouver real estate buyers that could find themselves severely disadvantaged. The federal Office of the Superintendent of Financial Institutions (OSFI) has introduced draft guidelines around the regulations of mortgage lending. The mortgage industry’s disdain for the decision is readily apparent, and it’s certainly not difficult to see why. Vancouver prospective buyers would be most at risk of seeing their buying capacities constrained, but all across the country we would see the already low number of households that could buy be reduced even further – and by quite a bit.
Let’s look inside this ‘Stress Test’, shall we? The first thing that’s a need to know fact is that conventional mortgages are to be tested at 200 bps above contract rate.
A conventional mortgage is one that’s predicated on a down payment higher than 20%. 200 bps in simpler terms is 2%. The new ‘reality’ will be that any mortgage with a down payment higher than 20% will now require that the borrower proves they can pay the mortgage at a rate that’s 2% higher.
At the most basic level this regulation makes sense. Interest rates are predicted to fluctuate in coming years, and buyers should be able to accommodate spikes – particularly given that mortgages need to be renewed over the course of the term. Essentially, conventional borrowers would now be on the same page as insured borrowers.
Detractors oppose this new regulation for many reasons, but none more prominently than this one; the likelihood of home prices dropping 20%+ is slimmer than the 5% required for an insured mortgage. In all fairness, that’s a solid argument but as is always the case there’s nearly certainly a number of extenuating possibilities that are factoring into the OSFI’s decision.
Lotus Land Letdown
In today’s lending atmosphere, few families and surprisingly few individuals as well can afford a conventional mortgage in Vancouver on a typical home. And as we haven’t dropped a staggering statistic yet, here you go – a typical home in Vancouver is now a hard-to-believe $1,037,300 according to the REBGV (Real Estate Board of Greater Vancouver). And that’s a typical composite, and not even a detached home. If you want one of those in both Vancouver and Toronto you’d better have extensive financial means.
What would appear to be the lowest mortgage rate now is somewhere in the vicinity of 2.89%. So let’s now work with that around a 20% down payment. That works out to only 24.21% of Vancouver households being able to carry the payments for a typical home under these new rules. In addition, this is also based on a decent credit rating for the applicant. The fact that just 4.1% of homes traded hands last year bears out the fact that fewer and fewer people are being deemed as qualified to borrow for buying a home.
Potentially Wide-Reaching Implications
The consensus seems to be that the proposed guidelines will reduce buying power by just over 25% overall. Vancouver will of course be significantly impacted, but there other spots in the country as well and you can probably name them off the top of your head as easily as we can. Stress testing drops the number of Census households that could carry a traditional mortgage on a typical home down to 16.68%, which as you might imagine is a brand new low and obviously concerning for those of us who make our living in the real estate business and want the industry to keep ALL afloat, not just a select few.
Looking at some other hotspots, 49% of Census households in Toronto have up until now been able to carry the payments for a typical home in Hogtown. The new regulations will make it that only 40% of households will be able to do so.
Now of course this is not some sort of arbitrary and punitive decision introduced at the Federal level to impinge a buyer’s ability to buy homes. There’s two sides to these numbers. Seeing to it that people can continue to pay their mortgage at a higher rate is clearly a responsibility. However, there of course will be fewer numbers of people who will be able to borrow. Accordingly, we’ll see transaction volume decrease significantly as less buyers qualify or home prices will drop as fewer qualified buyers will be active in the market.
Neither prospect is going to be particularly appealing for realtors, but you just have to believe in the ‘invisible hand’, if you will, that has been dictating ebbs and flows in this industry for many decades now.
