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Canada's Mortgage Stress Test Gets Easier To Pass Amid Soaring House Prices

It was already probably going to be a hot spring housing market. Now it will be even hotter.
An aerial view of suburban homes in Port Moody, B.C. The federal government has made the mortgage stress test a little easier.
edb3_16 via Getty Images
An aerial view of suburban homes in Port Moody, B.C. The federal government has made the mortgage stress test a little easier.

MONTREAL ― What was expected to be a hot spring housing market in Canada looks set to be a little bit hotter following the federal government’s announcement Tuesday it is changing the mortgage stress test.

Finance Minister Bill Morneau’s office announced that it’s changing how it calculates the rate used for the stress test as of April 6 of this year. Market experts say if the change happened today, it would effectively drop the rate used in the test to 4.89 per cent, from 5.19 per cent (the Bank of Canada’s current posted rate).

The change is expected to boost buying power for borrowers of insured mortgages by about 3 per cent. A household earning $100,000 a year would be able to afford a mortgage of around $526,000 under the new rules, compared to around $511,000 under the current rules, according to calculations from mortgage comparison site Ratehub.

Watch: Celebrities who’ve snapped up Canadian real estate. Story continues below.

Canada’s federal banking regulator, OSFI, announced on Tuesday it’s considering making the same change to the stress test for uninsured mortgages.

“The new rules will certainly add to what was already likely to be a buoyant spring housing market,” Dominion Lending Centres chief economist Sherry Cooper wrote in a client note.

Cooper estimates the changes will boost buying power for borrowers of insured mortgages by only around 3 per cent, but “the psychological boost will be positive. Homebuyers ― particularly first-time buyers ― are already worried about affordability, given the double-digit gains of the last 12 months.”

The average resale price of a house in Canada jumped 11.2 per cent in January, compared to a year earlier, thanks in part to a rebound in sales in Vancouver and continuing strength in Toronto. With prices rising quickly once again, many sellers appear to have decided to pull their homes off the market for better prices in the spring, further pushing up prices.

James Laird, president of mortgage brokerage CanWise Financial and co-founder of Ratehub, says the change to the test will mean that some small fraction of would-be buyers who were shut out of the market will be able to afford to buy a home.

“Is it a dramatic change? It isn’t, but every bit is helpful when you’re right on (the verge of) being able to enter the market,” he told HuffPost Canada.

Laird stressed two complaints that the industry had about the stress test: That the test didn’t reflect the drop in mortgage rates last year, and that it essentially allowed the major banks to set the qualifying rate for the whole mortgage industry.

The current stress test uses the Bank of Canada’s posted rate, which is an average of the official rates at Canada’s major national banks. That rate typically has been two percentage points higher than the “discount” rates banks actually offer borrowers.

But last year, when offered rates dropped, the official ones didn’t ― so the gap between offered rates and the rate used in the stress test grew, and the test in some cases now adds as much as 2.75 percentage points to a mortgage rate.

The new test will base its numbers on mortgage rates listed in insurance applications, addressing these concerns, Laird said.

The new test will have “a slight positive effect in terms of affordability, so it isn’t going to dramatically overheat the housing market,” he added.

More price hikes?

Bank of Montreal senior economist Robert Kavcic suggested the change will put upward pressure on prices as it will allow some buyers to move up the ladder to a more expensive property.

“Arguably, the impact will be as much on prices as on unit demand,” he wrote in a client note Tuesday.

“Someone who was right up against the limit before these rules were brought in might just have moved down the price ladder until they qualified. We could see the opposite this spring, especially if the measure is extended to uninsured (mortgages),” Kavcic wrote.

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