The State of the Residential Mortgage Market Study
Whether you intend to buy, sell or renew your mortgage in 2018, a study prepared by Will Dunning, Chief Economist for Mortgage Professionals Canada, provides revealing insights. The study, named the Annual State of the Residential Mortgage Market in Canada, is well worth reading. The following is only a glimpse at some of the findings it discloses.
A Decade of Mortgage Policy Changes and Stress Testing
Within the last ten years, the government has passed seven sets of rules designed to reduce mortgage borrowing. Two of these important policy changes, involving stress-testing are as follows:
- As of October 2016, all borrowers requiring insured mortgages have been put through a stress test. That is, the borrower must qualify at qualifying rate, a rate that is considerably higher than the contracted rate.
- As of January 1, 2018, all mortgages issued by federally regulated lenders will have to undergo stress testing. That is, all borrowers with more than 20% down payment have to qualify for their mortgage based on the greater of the qualifying rate of 4.99% or 2% added to their contract rate.
91% of Buyers Need a Mortgage;
Over 18% Will Fail Stress Testing
Of the 91% of all buyers that need a mortgage, around 80% will be put through a stress test. Because the qualifying rate has increased by .35% and actual interest rates today are up about .75%, Dunning estimates that more than 18% of buyers, otherwise able to buy, will fail stress testing.
Effects from Failing the Stress Test
Buyers who fail the stress test would have to reduce their home-buying price by an average of $31,000 or 6.8%. About 21% would have to reduce their home-buying price by less than 2.5% or alternatively increase their down payments. About 57% would need target price reduction between 2.5% and 9.99%. Of those who are required to reduce their home price expectations by 10% or more, most will not be able to find “housing options acceptable to themselves at the revised target prices.”
Regarding Purchases: The number of homes purchased each year runs at about 700,000. Because of stress-testing, over the next two years about 200,000 families will be negatively affected in one of two ways:
- They will have to reduce their housing expectations significantly, or
- They will be prevented from buying altogether.
Regarding Renewals: This does not include the estimated 200,000 Canadians needing to renew their mortgages who will fail the stress test. This may disallow them from obtaining their “the lowest possible interest rate.”
Overall, 6% to 7.5% of all home buyers will not be able to make a home purchase. In 2016, the home ownership rate dropped to 67.8% compared to 69% in 2011. For first-time buyers ownership fell by more than 4%. “All things considered”, states Dunning, “It appears highly likely that the homeownership rate will fall further during the coming years.”