Experts say effects of stress test on local housing market will emerge in spring

by Todd Lewys

On October 3, the federal government announced that mortgage rules were about to tighten yet again.

With that announcement, those in search of a home — in particular, first-time buyers — had a two-week window in which to buy a home before a “stress test” would be performed on mortgage applications so that buyers could afford to get into the market, and then meet their payments when interest levels rise.

Now that the stress test has gone into effect, which entails using the posted rate of 4.64 per cent to determine a buyer’s ability to make payments when interest rates rise, there’s been plenty of speculation on the effect it’s going to have on markets other than Vancouver and Toronto, which are the markets the Office of the Superintendent of Financial Institutions is actually seeking to cool down.

“At this point, it’s hard to know what the impact will be,” said Winnipeg REALTORS® president, Stewart Elston. “It would likely be on first-time buyers and single persons who have limited financial resources, and who are looking to get into a home with a (minimum) five-per-cent down payment.”

Diane Macpherson, an Accredited Mortgage Professional (AMP) and new director for Mortgage Professionals Canada in Manitoba, said that the new stress test is, to say the least, very stringent.

“Now that the stress test is in effect, home buyers will have to qualify at 4.64 per cent on any insured mortgage,” she said. “Up until October 17, buyers could use the five-year rate, which fell somewhere between 2.39 per cent and 2.49 per cent to qualify.

“Qualifying at 4.64 per cent as compared to 2.49 per cent is quite a disparity,” she added.

It’s also a disparity that could make finding a good home much tougher for first-time home buyers.

“For example, let’s say a couple was approved for a mortgage amount of $230,000 to $280,000 prior to the stress test taking effect,” she said. “Once it came into effect, cut that amount by 20 per cent. The cut then will take their budget into the low $200,000 range. That makes a big difference in the quality of home they can afford to buy.”

Elston agrees with Mcpherson’s assessement.

“While I recognize that it may be a necessary evil for the federal government to rein in Toronto and Vancouver to cool down their markets, this change is going to be tough on first-time buyers and single people with only one income,” said Elston.

“While a couple might be able to adjust and wait to save more money, a single person isn’t going to be much further ahead in how much they can save a year down the road because they can’t save money as fast as two people can.”

That’s why the government shouldn’t be using the five-year benchmark rate, said Macpherson.

“I don’t know why the rate is so high, and I don’t know why they arrived at that rate.

“When news of the test came out in early October, it came out with little or no discussion with our industry. What I’d really like to see is them use a rate somewhere between, say about 3.5 per cent. That would be a fair test, and wouldn’t be so devastating.”

With the stress test now firmly in place, Macpherson said it’s here to stay, adding that there’s nothing to do but wait and see how it will impact the real estate market in Manitoba and other provinces.

“We won’t get a real measure of its effect until the spring,” she said.

Realtor Lorne Weiss, who serves as chair for the Manitoba Real Estate’s (MREA) political action committee, said Macpherson is bang on in her assessment.

“We won’t be able to tell for sure (about the test’s impact) for several months until we gather data on the effect it’s having,” he said. “The CREA (Canadian Real Estate Association) is going to monitor it closely. Realtors are adaptable and resilient — they will figure out how to make it work.”

However, if things don’t work, the government shouldn’t expect Realtors to remain silent.

 “We will hold the government accountable if these regulatory changes have a negative effect,” Weiss said. “At this point, it’s all conjecture — it’s hard to anticipate the impact (of the stress test) with any degree of accuracy.

“We’ll just have to wait and see,” he added.