Now we get the real test. A potential and proverbial perfect storm for housing.
For the first time ever, Canada is facing overvaluation in its biggest markets, over-indebted consumers, a major tightening of mortgage rules and the prospect of rising rates.
This is not a drill. Homeowners might well start preparing for three things:
Tougher mortgage guidelines
Canada's banking regulator (OSFI) is proposing that anyone who gets a mortgage at a bank or bank-funded lender prove they can afford a rate that is at least 200-basis-points higher than their actual rate.
A similar debt-ratio "stress test" is already in place for folks getting a default insured mortgage, as well as most variable-rate and short-term borrowers.
Albeit, banks do make "exceptions" to their debt-ratio limits for otherwise strong uninsured borrowers. But now, no one getting an uninsured mortgage at a bank (with a five-year term or longer) will be able to escape the stress test. Come this fall, it would apply to almost all of the 4 out of 5 mortgagors in this country who have at least 20-per-cent equity.
If OSFI's change goes through as planned, otherwise credit-worthy borrowers would qualify for roughly 18 per cent less mortgage, other things equal. This one change would have more of an impact to mortgage shoppers than any Bank of Canada rate hike in history.
If you believe the Bank of Canada's hints and bond market probabilities, there's a real chance we'll see higher floating rates as soon as next week's rate meeting, or at its meeting in September. (Albeit, Thursday's OSFI news could limit the BoC's rate hike plans.)
As for fixed mortgage rates, they've already shot up on the back of a 50-basis-point surge in bond yields since June 6. RBC, Canada's de facto leader in setting mortgage rates, hiked most of its advertised fixed rates by 20 basis points on Thursday morning. Most other lenders have done the same and it may be only the first of multiple moves.
Home prices under pressure
Near-term, many home buyers will hurry into the market before rates shoot up, the new stress test kicks in and they can't qualify for the same size mortgage.
But later this year, Canada's real estate market could shift decidedly to a buyer's market – assuming these higher rates and stricter rules siphon demand as expected. We're already seeing a selloff in the Greater Toronto Area, with average prices down 13.8 per cent in just two months. The news above may only exacerbate that selling. It's categorically bearish for most small and mid-sized markets.
What to do
The housing market has repeatedly defied expectations despite everything the government has thrown at it. And market predictors are wrong half the time. So it's almost foolish to call a top with confidence.
But I will say this:
Please don't feel rushed to buy. Any short-term spurt in demand could easily fizzle as sellers start to realize what's happening. And while we're at it, can we shelve that overused acronym FOMO (fear of missing out)? There's now far less risk of waiting for your dream home. In fact, you may very well find it "on sale" this fall.