New Stress Test Rules – How Will They Affect the Market?
April 28, 2021
I often start one of my “state of the market” blogs noting that the numbers released by the Toronto real estate board don’t always tell the whole story, but this month, they actually do.
For fun, let’s start with a visual aid to describe global real estate markets… check out this Tik Tok video!
In Toronto, sales were up over March 2020 considerably, which is not a surprise considering the city shut down mid-March. However, the average price for a detached home in Toronto is now $1.75M while the average semi sold for $1.288M.
Click here for the report
A common question I often hear is, “Where is all this money coming from?”, and I have some theories…
- There are buyers who have sold their current homes which have sold for significantly more than they were expecting and they can now afford to increase their budget
- Sometimes it’s the bank of Mom and Dad. Parents are helping this children get into the market by gifting inheritance early.
- There are buyers with significant “pandemic savings”. People who were in a strong position before the pandemic are in a stronger position now. There’s nothing going on in anybody’s life, so buying a home is the ultimate in retail therapy.
- Money is cheap! So, with mortgage rates continuing to be as low as they are, buyers can afford more.
What’s the downside to exponentially increasing home prices? Buyers now find themselves priced out of a neighbourhood they could have afforded six months or a year ago. At that time though, there were very few homes for sale and competition was fierce.
The good news, as we enter the robust spring market, is that there are more homes on the market right now; not significantly more but enough that it means a buyer may be one of 4 offers as compared to 7, 8 or 14. However, there is a continuing trend of increased sales prices and it’s making securing a home more challenging.
In an effort to slow down the market, the Office of the Superintendent of Financial Instutitions (OSFI) is looking at toughening the mortgage stress test. When the test was originally introduced a few years back, there was a flurry of activity just before it was implemented. Buyers rushed to make a purchase that they may not have been able to qualify for after the rules took effect.
My guess is it’s going to have a large an impact this time around, and here’s why.
You can get a 5 year variable mortgage now with an interest rate of 1.45% and for a $500K mortgage at that rate it means a monthly payment of $1,987.
Under the current stress test, even though you’ll get a lower rate, the rate you have to qualify for is 4.79% (average posted five-year big bank mortgage rate) and at that rate, your monthly payment would be $2849.
The new rule would ask you to qualify for a rate of 5.25%, meaning you need to be able to pay $2980, a difference of just $131. Will it eliminate some people? Certainly, those who are stretched to their absolute limit. While $131 is a lot of money to some people, if you’re looking at buying a million dollar property and this could break you, I’d suggest revisiting your budget.
Here are my predictions:
The OSFI rules are good to offset potential loss, but the only thing that will really make a difference is increased mortgage rates and more inventory. Right now, inventory remains extremely low and demand is high.
I’m confident prices of homes will remain at this level because for the most part, this market is not speculative. I think this is the new normal. I’ve seen predictions that the average single family home price in Toronto in 2030 will be $3M and up, and that could be conservative, so real estate remains a good long-term investment, even at today’s prices.
My advice for buyers now is to have patience and stick to your budget. People still need to be within a range that makes sense for them. If they can’t get the perfect house they imagined, they’ll have to make some changes to what their needs and wants are. One needs to act quickly, but only after they feel like they’re educated enough to make the right decision.
Oftentimes, the buyers who are succeeding in this market are sometimes putting themselves in a position where they’re uncomfortable with the numbers. It’s a scary leap of faith and sometimes necessary to secure a home but you can’t jeopardize the ability to pay your bills. You have to set a limit in your mind and stick to that if that’s really what you can afford. Be prepared to act fast when you find the right property – you could be asked to make a decision on the day a property is listed.
If you have any questions about navigating Toronto’s crazy market, an experienced realtor is your best bet. Call or email me, I’m happy to answer any questions!