Used to play pretend, give each other different names
We would leverage to the hilt, drop it all on real estate
Used to dream of condo flipping, now they’re laughing at our face
Singing “wake up, you need to make money”, yeah
Wish we could turn back time
To the good old days
When they gave crediiit… like candy but
Now we’re stressed out
– Twenty one pilots feat. OSFI
You’ve probably heard of the new rules that are coming down the pipe from the Office of the Superintendent of Financial Institutions (OSFI, our friendly bank regulator). It’s OSFI’s job to make sure our banking system doesn’t get carried away in some irrational exuberance of the day and take after that of our southerly neighbours.
Well it turns out these days they are mighty concerned about the froth in the real estate market and they are determined to stamp it out by any means necessary. Last year, they introduced the stress test for anyone that wanted a mortgage with less than 20% down. That meant that buyers had to prove they could afford not only the rate they would be paying (two point something percent) but the Bank of Canada’s average posted 5 year rate (four point something percent).
This doesn’t seem that unreasonable. After all it’s quite likely that rates will rise at some point, and given we Canadians don’t get the luxury of 25 year rates, it would be very prudent for all buyers to verify that they will be able to afford the same mortgage at a modest couple percent higher. What happened next though, was somewhat concerning.
After the stress test on insured mortgages was introduced, there was a 25% drop in mortgage volume. As the CMHC observed: “Those volumes dropped off right away when those changes were implemented, which was at the very end of 2016, and we have seen our volumes remain relatively stable since that time”. Clearly about a quarter of buyers were so marginal that they couldn’t pass the stress test. Some of those buyers delayed purchases, some got extra down payment funds from parents, and some got creative and cobbled together the 20% down payment through private or secondary lenders to avoid the stress test.
Well the OSFI has caught on to that and is not amused. So by the end of October they will be finalizing new rules to extend the stress test to all mortgages and crack down on creative financing intended to get around those rules. Those rules will then take effect a few months later.
What does it mean for Victoria? Well if they are approved as written, it’s going to take a lot more income to qualify to buy. Looking at the median detached house and condo for the past few years, we can estimate the income required* to qualify for a mortgage with 20% down, and then do the same after the stress test.
*Note that these income levels are calculated based on commonly accepted lending ratios, however each lender will be unique.
The buyer of the median condo will need to ask their boss for an extra $10,000, while someone with their sights on a house will have to figure out how to be $20,000 more valuable.
Last year’s rules hit less than 20% of our buyers. This year it could impact 50%.
Who knows how many of those buyers are on the edge, but it could sideline a significant number of them. One might imagine that the impact could be felt particularly in the condo segment where there is less cash floating around. What do you think? Will this affect our market or is it a nothingburger like most of the previous attempts at limiting credit?