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Stress Test Creating a Chill for First Time Buyers

Stress Test Creating a Chill for First Time Buyers

While WInnipeg has been experiencing a near record breaking cold spell, there are plenty of significant housing and real estate market challenges to keep REALTORS® warm while waiting for their cars to heat up. 

One that comes to mind, which is receiving national coverage, is the impact of the federal stress test on home buyers' ability to afford and purcahse a home.

Will Dunnning, Cheif economist of the Mortgage Professionals Association (MPC), and WinnipegREALTORS® forecast breakfast keynote speaker in 2018, generated fresh interest in this issue with the January release of MPC's consumer report, Annual State of the Residential Mortgage Market in Canada. 

In his report, Dunning draws a number of conclusions which, while more salient in their impact on expensive housing markets across the country, still resonate here based on our market results.

What is telling is what he had predicted would happen in 2018. He called for national resale activity in the range of 470,000 (13% lower than in 2016 and 7-8% on 2017), while actual sales fell to 458,400, an 11% decrease compared to 2017 and 15% from 2016. Im comparison, WinnipegREALTORS® resale market for single family houses fell less than 5% compared to 2017 and less than 7% for 2016. For condominiums, 2018 sales slipped 8% from 2017 and 6% from 2016.

Dunning attributes the drop of sales activity largely8 to the two Office of Superintendent Financial Institutions (OSFI) mortgage stress tests which took effect on insured mortgages in October 2016, and on uninsured mortgages on January 1, 2018. Dunning gave minor consideration and acknowledgement to the interest rate increased that occured in 2018.

More to the point, Dunning said, " Most fundamentally, Canadians, especially young middle class ones, will, in large and growing numbers, be denied the opportunity to build their financial futures through home ownership."

This same report explains how home ownership is decreasing in the younger demographic age groups. From 2011 to 2016, those aged 25 to 29 experienced a 4.6% decrease, 30 to 34 slipped 4.2% and 35 to 39 fell 3.6%.

While there are no breakout numbers for Manitoba or Winnipeg, something quite revealing in the last three years, is how single family home sales in what has been considered the prime first-time buyer market of under $300,000 have declined significantly.

Specifically, when you look at the more active first time buyer price ranges of $150,000 to $199,000, $200,000 to $249,000, and the most active one of $250,000 to $299,999, 2018 home sales fell 10% over 2017 and 19% over 2016. Conversely, sales over $300,000 in 2018 matched 2017 and were 17% higher than 2016.

A number of well publicized national surveys by the Canadian Real Estate Association (CHBA) in 2018 clearly show that the majority of millenials and/or middle class Canadians express a strong desire for home ownership. Therefore, it does not sit well with them that the federal government is making it more difficult for Canadians to access home ownership.

If the federal government was aiming to cool off hotter housing markets with accelerated price increases, it has achieved that. However, this has come at the expense of other markets across the country which did not need this adjustment. The result is that many first time home buyers have been unnecessarily impacted by the federal mortgage stress test.

MPC's CEO Paul Taylor referenced Dunning's report with the following comment in "The association supports prudent and evidence driven actions to test a borrower's abilities to make future payments. Our report illustrates that a more reasonable stress test level and lending restriction reforms are now needed to strike a better balance for borrowers and policy makers, improving housing affordibility and Canada's economy," he said.

Finance Minister Bill Morneau has indicated in the lead up to the 2019 federal budget that he is looking at measures to make home ownership within reach of more millenials. The evidence is undeniable that first time buyers in particular are being negatively impacted by the federal stress test.

CREA and CHBA have been active in pointing out how local markets across the country are being affected (e.g much longer time to save for a downpayment) and also putting forward recommendations, as is MPC, with suggestion to reduce the qualifying stress test rate from 2 full percentage points over the initial contracted rate to 0.75 points.

CHBA recommends that quilafied first time buyers be provided access to mortgage amorization periods of upto 30 years for insured mortgages. CREA is also seeking a higher federal first time home buyer non-refundable tax credit from its current $750.

If there is any consolation for Winnipeg's housing market, based on National Bank's 2018 fourth quarter Housing Affodability Monitor report, the income required for a median priced home of $321,259 is $58,976, with 28 months of saving required for the down payment (saving rate of 10%). In sharp contrast, in Toronto, if you have the required income of $165,755, it will take 112 months of saving to purchase the median priced home of $902,916.

Advantage to Winnipeg!

Source: Winnipeg Real Estate News


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