Stricter rules for mortgage stress test are coming, but the market’s not in a hurry

Starting June 1, homebuyers in Canada will need to undergo a stricter mortgage stress test, cutting their buying power and probably supporting the market’s cooling, which has already started.

Although new rules tend to cause a rush of buyers, eager to make a purchase under the old regulations, industry observers say it’s not the case this time.

“Most people in the industry expected market activity hike a few months before June 1, but we haven’t seen that,” – noted John Pasalis, president of Realosophy Realty.

“Of course, there are certain buyers who want to purchase a property before the new rules take force, but the overall market mood is much calmer than we predicted.”

The new minimum qualifying rate of 5.25% will reduce the household’s buying power approximately by 4%. In case you can qualify for a $500,000 mortgage today, the sum will go down to $479,000 next week.

However, it’s still an additional difficulty for homebuyers who already had to deal with a stress test under today’s minimum qualifying rate of 4.79%.

“It uses an already very high qualifying rate with a small increase,” – says BMO senior economist Robert Kavcic.

“This rule change is much less significant than the one introduced in 2018, so there might not be such a rush at the real estate market this time.”

As you know, the tightening of mortgage rules in 2018 caused a sharp activity increase, as it reduced homebuyers’ purchasing power by about 20%.

Another point of interest for homebuyers is the market reaction, as many of them have been priced out by a fast prices rise during the pandemic, caused by cheap money and strong demand.

The new rules take force when the real estate markets are already showing signs of cooling down. Earlier this month, the CREA pointed to April’s home sales decline by 12.5% compared to March.

“The housing market has been already cooling down naturally over the past few months,” – says Pasalis.

“In my opinion, the higher qualifying rate will support this trend, helping the market shift from today’s tight seller’s market to a more balanced one.”