Stress Test Consequences Adding Up

New data has more than a few observers second guessing Ottawa’s latest mortgage clampdown.

RE/MAX’s 2018 Spring Market Trends Report quantifies the by-products coming from one of the biggest mortgage rule changes ever, the uninsured mortgage stress test. The data beg the question, are the side effects worse than the government’s medicine?

More Buyers Are Being Hamstrung

One in four homebuyers (26%) report having been “impacted” by the mortgage stress test, according to RE/MAX’s findings.

Of those people:

• one quarter of buyers settled for a smaller home
• 18% of buyers settled for a home in a less optimal location
• almost one in three opted not to purchase at all.

Those hit hardest are younger purchasers and hopeful buyers in urban markets, where the jobs they need are most plentiful.

Surging Rents

Ottawa’s stated goal with its restrictive new rules was to improve the quality of borrowers.

Knowing people have to live somewhere, regulators essentially decided that fewer people should own and more people should rent. And that’s exactly what’s happening. The government’s stress tests, which radically changed decades-old underwriting rules, are now forcing would-be buyers to stay renters.

Housing bears cheer this development. But it may be a pyrrhic celebration, because with surging rental demand comes—you guessed it—surging rents. Urbanation senior vice-president Shaun Hildebrand told the Globe and Mail that ballooning rental demand has driven up Toronto condo rents to the tune of 11 per cent this year.

Canada’s debt problems, which were previously fuelled by excess homebuying demand, is now being exacerbated by cash-strapped renters. Finance Department policy-makers have essentially shifted profit from bankers to landlords.

Regulators had to foresee this. So you’d think they’d try to soften the impact with better rental housing initiatives.

But where are they? CMHC’s housing strategy is heavily geared to low-income Canadians. The Fed are barely making a dent in the housing problem for urban middle-class families.

Still (Some) Record Prices

Canadian homeowners have lost 10% of their home value over the past 12 months. But not everywhere.

Sellers of Vancouver townhomes laughed off government attempts to cool the market. Buyers pushed their prices to record highs in March.

Big-city buyers—who’ve seen their mortgage-buying power slashed 18+%—continue to shift into cheaper townhomes and condos because that’s what government rules let them afford. Many downtown Toronto condos are routinely drawing 10+ offers.

“This is the second year of double-digit [price] increases for condos and this is not only unsustainable, but we believe this is the biggest problem in the Toronto real estate market,” says RE/MAX Condos Plus. “Prices of $1,000 per sq.ft. are common for condos…”

Detached home prices, on the other hand, haven’t fared so well lately. In March they plunged 7.4 per cent in just one month, thanks largely to B.C.’s new taxes on high-end homes.

In any event, if you’re middle class and want to live in the GTA or GVA, good luck out there. Local real estate analysts suggest people earning $30,000 to $80,000 might as well start their home-hunt 30-60+ minutes from downtown. They’re still waiting to see how the federal housing strategy helps them, and they may be waiting a long time.

Where to Now?

“Even with lower demand, upward pressure on prices will continue as long as the supply of homes for sale remains low,” said Vancouver real estate board chief, Phil Moore.

That one sentence sums up Canada’s housing predicament.

In the short term, new mortgage regulations are letting off steam from boiling hot detached home demand. Longer term, however, they’ll have little effect as mortgagors adapt and hundreds of thousands of new buyers flock to our biggest cities.

Canada desperately needs more affordable middle-class homes within commuting distance to its job centres. One solution is incentivizing more development where land is cheaper and building high-speed rail to get people to that land (and no, not just more Go Trains and SkyTrains, but radical revolutionary high-speed rail).

If governments don’t drastically improve commuting times and access, we’ll be back to square one 10 years from now: more unobtainable homes, more record prices and more record rents. Affordable housing for the masses will stay a pipe dream and heftier taxes and stricter borrowing rules (like the debatable new stress test) won’t come close to solving the problem.