Feds urged to reconsider mortgage stress test
TORONTO — Canada’s largest real estate board is calling on Ottawa to revisit whether a stricter mortgage stress test introduced last year is still needed, arguing that the policy has negatively affected the economy and Toronto’s once red-hot housing market.
“While we saw buyers return to the market in the second half of 2018, we have to have an honest discussion on whether or not today’s homebuyers are being stress tested against rates that are realistic,” John Di Michele, chief executive of the Toronto Real Estate Board said in a statement this week.
“Home sales in the [Greater Toronto Area], and Canada more broadly, play a huge role in economic growth, job creation and government revenues every year. Looking through this lens, policymakers need to be aware of unintended consequences the stress test could have on the housing market and broader economy.”
The Office of the Superintendent of Financial Institutions-mandated stress test, which came into effect in 2018, cooled housing markets in Toronto and Vancouver by limiting the ability of those with a more than 20 per cent down payment to qualify for mortgages.
The stricter rules require borrowers to prove that they can service their uninsured mortgage at a qualifying rate of the greater of the contractual mortgage rate plus two percentage points or the five-year benchmark rate published by the Bank of Canada. The policy also reduced the maximum amount buyers would be able to borrow to buy a home.
An existing stress test already required those with insured mortgages to qualify at the central bank’s benchmark fiveyear mortgage rule.
Office of the Superintendent of Financial Institutions assistant superintendent Carolyn Rogers defended the stricter rules, saying that a “margin of safety” was still “prudent” in the current economic climate. She also said the group was open to changes when warranted.
The Toronto Real Estate Board, which represents more than 52,000 real estate agents across the region, said that under the stress-test rules, homebuyers have to qualify for monthly mortgage payments nearly $700 more than what they would pay.
“In order to account for the higher qualification standard, intending homebuyers have adjusted their preferences, including the type of home they intend on purchasing,” said the report, resulting in the increased popularity of condos and townhouses over detached homes.
Realtor Tom Storey said demand in the Toronto housing market remains strong despite the stress-test rules, noting that a bungalow in east Toronto he visited last month with a client garnered 21 bids and sold for more than $200,000 over the asking price. He said there are still many buyers out there, but the problem is that inventory is drying up, especially in these slow winter months.
Storey said he doesn’t think doing away with the stress test would result in a more equitable real estate market.
“I am no longer seeing prices that make me scratch my head,” he said. “The properties that are priced correctly are selling quickly and the ones that are overpriced are sitting on the market. That’s what a healthy market should be like. We had a 10-year run of serious price growth and we’re going to go back to more moderate levels now.”
Despite the challenges, the Toronto Real Estate Board says it expects to see a “moderate improvement” in sales and sale price this year in Toronto’s real estate market, but doesn’t anticipate either to hit the record levels seen in previous years.
The board said other factors such as population growth, low unemployment rates and potentially stable interest rates will help Toronto’s housing market this year.
The Bank of Canada has raised the benchmark rate five times since mid-2017, encouraged by a stronger economy, and signalled that more rate increases are likely, but will come about slower than originally expected.
The outlook forecasts that 83,000 sales will be reported through the board’s Multiple Listing Service system in 2019, up 7.2 per cent from 77,375 sales recorded in 2018.
The board expects the average selling price for the year in Toronto and the Greater Toronto Area will increase to $820,000 — close to the peak reached in 2017 — and up from an average of $787,195 in 2018.
Much of that price growth will be led by the hot condominium market as homebuyers look for more affordable housing options, while the board anticipates the price growth for detached properties to be below the average growth rate for the total market.
Meanwhile, the board expects new listings will remain flat this year after pulling back in 2018 to sit between 155,000 and 156,000.
The report also cautions that the rental market in Toronto and the surrounding area will remain “tight” this year.
“The supply of rental units could continue to be problematic in 2019,” it warned.
The board also reported that home sales in Toronto and the surrounding area saw a small uptick in January, a sign that the real estate market in Canada’s largest city remains stable.
It said there were 4,009 home sales recorded in January, up 0.6 per cent compared with January 2018. On a seasonally adjusted basis, sales were up by 3.4 per cent versus December 2018.
The board said the average selling price for all property types was $748,328 last month, an increase of 1.7 per cent from the same month a year ago.
The condo segment led the price growth, up by 7.9 per cent in January.