First National Financial LP

Residential Market Commentary - Tightening the stress test

  • First National Financial LP

Canada’s unrelentingly hot housing market has led to increasing calls for government to step in and pour some cold water on the situation.

The country’s main banking regulator has heard those calls and has announced it will revisit a past policy that helped things cool off the last time the market caught fire.  The Office of the Superintendent of Financial Institutions is proposing a plan to make the financial stress test for home buyers tougher.

To quickly review: The stress test was implemented in 2018 as part of revised home borrowing requirements known as the B20 guidelines.  The stress test requires home buyers to qualify for an uninsured mortgage (usually one with more than 20% of the purchase price as a down payment) at an interest rate that is 2.0% higher than their contract rate or at the Bank of Canada qualifying rate, whichever is higher.

Most buyers are now forced to qualify at the BoC’s benchmark rate of 4.79% which is significantly higher than most, real, lending rates.  OSFI, the banking regulator, proposes pushing that rate up to 5.25%.  OSFI’s main objective is to protect the financial sector, not borrowers.

Even as housing has been boosting the country’s pandemic-plagued economy, the Bank of Canada is warning, “it may also be intensifying housing market imbalances and household indebtedness.”

“The evidence presented here generally suggests these vulnerabilities have increased in recent months,” the Bank said in an analytical note.

New mortgages to highly-indebted households are also rising sharply, according to the BoC.

OSFI plans to have the new, higher, qualifying rate take effect on June 1st.  Many market watchers expect that will trigger an even more frenzied spring home buying season across the country, as buyers look to “get in” before they are blocked out, or priced out, of the market.