Rising home prices and the return of bidding wars in Toronto have economists warning against any measures that could stimulate the city’s real estate market, such as relaxing the mortgage stress test.
The federal banking regulator and the Finance Department are considering changes to the mortgage stress test, which requires borrowers to qualify for a higher interest rate than they’re being charged. The mortgage and real estate industry complain that the rules are too rigid, and unnecessarily punish borrowers if they want to switch lenders.
The review comes as the country’s two most expensive markets, Toronto and Vancouver, are starting to heat up. In Toronto, home sales rose 15 per cent in January over the previous year, the 10th straight month of double-digit year-over-year increases. In Vancouver, sales jumped 42 per cent, the seventh consecutive month of double-digit increases.
“Policy makers may need to dust off some new measures to cool demand, and that seems to be even more the case now,” said Douglas Porter, chief economist with the Bank of Montreal. “The last thing we want is for the market to do even a mild imitation of three years ago.”
That mild imitation has already started in the Toronto region, where realtors are drawing comparisons to 2016 and 2017, when buyers were scrambling to buy anything and offering hefty premiums.
“It is like 2017 all over again,” said Carrie Skidmore, a realtor with Union Realty Brokerage Inc. in Toronto.
In February, two of Ms. Skidmore’s clients jumped on properties before they hit the market and both offered a premium. In January, another client offered $521,000 over the asking price of $799,000 for a three-bedroom house.
“Both paid a premium because they are afraid they are going to be pushed out of the market if they wait for the spring,” Ms. Skidmore said. "They want to get ahead of everyone else. They are fearing that the prices are bubbling over like they did in 2017.”
Tim Syrianos, a broker with RE/MAX Ultimate Realty, said it is not quite as frenzied as early 2017, but that there are similarities. “There is the same kind of feeling of people snapping up whatever hits the marketplace. There are a lot of buyers out there,” he said, adding that homes are seeing multiple offers from the city’s core to the nearby suburbs.
Languishing housing supply has increased competition in the Toronto region. The number of new listings in the Greater Toronto Area in January fell 17 per cent, compared with last year, which helped push up the average selling price of a home to $839,363, from $747,175 a year ago.
“The last thing the market needs right now is any policy move that would tighten things up even more, be it by restricting supply, or more importantly, by stimulating demand,” said Robert Hogue, senior economist with the Royal Bank of Canada.
Mr. Hogue said this could occur if the mortgage stress test was relaxed, if the Bank of Canada cut interest rates or if Ottawa expanded incentives for first-time home buyers. “If they end up adding fuel to the fire, it is not really warranted at this stage,” he said.
Since the stress test was implemented for insured mortgages in 2016 and then for uninsured mortgages in 2018, borrowers have had to qualify at a mortgage rate two percentage points above the going rate or at the central bank’s five-year posted rate, currently 5.19 per cent, whichever is higher.
The tougher rules and higher interest rates in 2018 made it harder for borrowers to get a loan, especially a large enough loan in places such as Vancouver and Toronto, where the average price of a detached house is above $1-million.
The Office of the Superintendent of Financial Institutions, which regulates Canada’s banks, is floating the idea of decoupling the stress test from the central bank’s posted rate. That could make it easier for borrowers to get a bigger mortgage, and subsequently drive up prices.
“They could tweak the tests for regional variations," BMO’s Mr. Porter said. But he added “if they eased them now, that could further inflame price pressures in tight markets.”
Some observers, however, believe the gap between the market mortgage rate and the central bank’s five-year posted rate, currently more than two percentage points, is onerous given that the central bank’s key interest rate has been stuck at 1.75 per cent since 2018.
“Stress testing seems a bit aggressive,” said Robert Kavcic, a senior economist with BMO. "If the stress test comes down, you are allowing people to move up the price ladder a little bit. Right now, I don’t think it is taking demand away, I think it is bumping people down the price ladder a little bit. "
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