The dreaded stress test, whether you like it or not, has 100% made its mark on the 2018 real estate market and continues to do so in 2019. As a quick refresher, the stress test is a requirement when you apply for a mortgage that forces you to be tested at a rate that is 2% higher (200 basis points) than the posted rate. So, if you were going to get a mortgage at 3.5%, the lender would have to test you at 5.5% before they qualify you for the mortgage.
20/20 – In hindsight, that seemed like a great idea with the rising Canadian debt levels. However, it has had such a profound effect on buyers, especially first-time home buyers, that the general public is making their voice heard for it to be removed.
Ultimately, the stress test has reduced buying power by around 20%. So in effect, if the stress test gets scrapped, then you could be approved for a 20% higher mortgage amount. For example, if you were told that you are pre-approved for a $500K purchase and if the stress test is removed, then you can now afford a $600K purchase instead. Oh how a simple change can shift the landscape of the entire market!
Word on the Street – There are many rumblings as of late with regards to what we can do to ultimately help Canadian citizens with the biggest purchase in their life. There have been many options thrown out there such as:
Extending the amortization term (lower monthly payments allow for a higher purchase price)
Reducing the stress test to 1% instead of 2%
Completely removing the stress test
Exempt first-time home buyers from the stress test
…plus a whole bunch of wacky ideas tossed around!
In my opinion, the stress test seemed like an overreaction to media headlines talking about our rising debt levels, which prompted the Federal government to take action. As with most changes, it all begins with a conversation and then more and more people will join in until there is a critical mass that pushes the government to make a change (i.e., the rent control that was issued 2 years ago by the Wynn government).
Winning Your Vote – Without getting too political here, there will bound to be at least one campaign in the upcoming Federal election later this year that will promise the removal of the stress test to win your vote. The stress test issue is very likely going to be constantly brought up.
What This All Means – Do I agree with removing it? [BREAK] YES, of course! For personal reasons, I would love to be able to afford more properties (who wouldn’t?!). For the City as a whole, it’s a good idea because people ultimately want to be able to own a property, and the removal of the stress test would help to facilitate just that. However, regardless of whether it is removed or not, we’re still going to have a supply issue. The removal of the stress is going to help the “next” Torontonian by allowing them to qualify for an entry-level property. When that supply gets gobbled up by the “next” Torontonian, the prices will go up (as a result of no more supply) and the “next-next” Torontoian will not be able to afford it. Hence, that vicious cycle will start again.
Unfortunately, this is the reality that many Torontonians are facing today. Unless we have less demand by reducing immigration or allow for more supply, the stress test is just the next talking point. After that, there will be another talking point about something else. The stress test is just the lowest hanging fruit for the politicians to pick on in order to win your vote.
The Wrap – Over the course of the next decade or two in Toronto, we will be a city where there is a clear separation between those who own at least 1 property, and those who do not own this type of asset at all. Very simply, the affordability gap is going to be so large that it will just be impossible to buy a property unless you inherit money from parents who own real estate.
We are following in the footsteps of big metropolitan cities such as Hong Kong, New York, Tokyo, and Paris. At the end of the day, it’s just like Monopoly – buy real estate and hold on to it. It’s simply the best way to win!
Until Next Time, Happy Real Estate-ing!
Zhen
