Does a new mortgage stress test really work the way it should?

While new mortgage stress test rules had to cool down an overheated real estate market by reducing the number of qualified buyers, it’s been more than two months after their implementation, and they don’t seem to work as well as they should.

“The new policy’s goal is right, but it only increases the burden for potential buyers,” – says Romana King from Zolo.ca. “We haven’t seen any gain in housing sales before the June 1 rise of the mortgage stress test qualifying rate for uninsured mortgages,” – she noted.

“It doesn’t mean the higher qualification rate will not affect Canada’s real estate markets. By decreasing the number of qualified buyers, the new rate will support the moderation of home sales, although not as significantly as many expected.”

It sounds reasonable. “The main drivers of housing purchases are solid employment and reliable income, while mortgage rates are secondary. Today’s low-interest rate environment means housing is relatively affordable,” – King says. “It means, during the previous 16 months, Canadians who kept their jobs and incomes faced a low cost of borrowing and the security guaranteed by housing and decided to enter the market”.

Earlier, when loan qualification rules were changed, the market used to show a sales activity hike. Look at 2017, when the market saw a significant activity increase at the end of the year, because new mortgage stress test took force on the first day of 2018.

However, we haven’t seen the same scenario this spring. The sales of detached houses in Toronto rose to 1,444 in March, but then fell to 1,320 sales in April, 1,252 sales in May and 1,085 sales in June. Condo market showed a similar scheme with 2,620 sales in March, 2,275 – in April, 1,877 – in May and then 1,901 in June.

Nevertheless, it doesn’t mean the market members can ignore stricter rules. “Buyers need to prepare for a weaker purchasing power or start saving up more for a larger down payment,” – King recommends. “Meanwhile, as mortgage rates go up, sellers should think how this higher qualification rate will affect the number of qualified buyers.”

More experts are worried by it. “The stricter stress test will definitely reduce the borrowing power for many Canadians, thus decreasing their ability to purchase higher priced homes,” – noted Jacky Chan, president of BakerWest. The company focuses on sales and marketing of new communities, including condos, townhouses and single-family houses.

“At the same time, the actual demand remains extremely high and it keeps growing. If we really need such stress tests, they should be more flexible to adjust to different incomes and made it easier for first-time homebuyers to become owners. Now, they only add challenges”.