I remember asking a mortgage broker pal of mine in the summer about the rumours that OFSI (the Office of the Superintendent of Financial Institutions, i.e. banks) was going to apply the stress test to purchasers who had more than 20% cash as a down payment.
This means requiring all buyers, not just those with less than 20% down (who are required to carry CMHC insurance in case of defalt) to qualify for a mortgage at a higher rate than the one they apply for. From what I understand, under the new rules, all buyers will be required to qualify for an extra two percentage points above the rate of their mortgage, and that’s a lot.
“It will never happen,” my friend said. “Our association is opposed to it; we don’t need it, the banks are already well-protected.”
Well, as I feared, he was wrong. The new rules kick in January 1st, and they are going to make it very hard for a lot of buyers to buy anything despite having good credit and lots of cash. It will hit the self-employed particularly hard, as well as first time buyers and retirees.
So what will the impact be? Well, put it this way: as a self-employed person with a great credit score (well over 800), lots of assets (I own a home and cottage, clear title) and zero debt, the amount I could borrow under the last round of mortgage rule changes dropped from around $ 500-600K to $ 360K. I haven’t crunched the numbers, but that was qualifying at the posted rate, without the stress test.
So a lot of people are not going to be able to afford to buy homes at all, even though they are extremely low risk. I think we’ll see properties listed at over $ 500K drop in value because they’ll be harder to sell. More deals will collapse on financing. More people will be forced into the rental market. So expect Ottawa rents to go up, and overall sales to go down.
I should emphasize that there is no housing bubble in Ottawa or smaller centres like Cornwall or Kingston. The Ottawa market was slow for the last three to four years with very modest increases in line with inflation. The average price of a home now is just over $ 415K, so we are not Toronto or Vancouver. We finally saw prices start to rise this year– this will likely kill that momentum.
These new rules are a solution in search of a problem, and they do nothing whatsoever to protect consumers, only banks. My honest opinion is that if the regulators don’t stop tinkering with the mortgage rules, given the importance of housing to the economy, they’re going drive the country into a recession.
For eight years, ever since I started in real estate, I’ve heard pundits claim the housing market was in a bubble and on the verge of collapse. This is getting very close to a self-fulfilling prophecy, and completely unnecessary.