After years as the hottest real estate market in Canada, Toronto’s real estate sales are taking a hit, with revenues in February 2019 ranking as the lowest in a year for the market. The sales decline hit 7.7%, the most significant dip since the same time last year, while prices are actually up, with the benchmark price rising 0.8% to $767,800. All-around, this points towards a downward trend for 2019, continuing the significant losses seen in 2018, which were overall the worst in ten years. As such, Toronto’s Real Estate board is calling for changes in policy to combat the downward trend, which they warn will cost the city a lot of money.
Is the Mortgage Stress Test too Strict?
According to The Financial Post, one of the likely culprits for the sudden downturn in the market is the new Canada-wide mortgage stress test rules. Under these new rules, which went into effect January 1st 2018, potential home buyers have to prove that they can afford payments at a qualifying interest rate by taking a “stress test,” at least if they want to borrow from a federally regulated lender such as a bank. Credit unions and other lenders are not required to use this test… yet. The rationale is that rising interest rates increase debt servicing costs and can force some vulnerable owners into arrears, which remain at a historically low 0.24% in Canada, and have been on the decline since the dark days of the recession.
Many speculators believe this strict test has left a significant chunk of potential home buyers out in the cold, and that the test itself is too strict. A recent report by Mortgage Professionals Canada (MPC) speculated that the stress test wrongly concerns itself too much with fluctuating interest rates, stating that mortgage defaults are typically more vulnerable to other factors, including job, loss than fluctuating interest rates. It’s also been suggested that the amortization period for federal mortgages should be increased to thirty years after having a new 25-year maximum imposed back in 2012. With a longer amortization period, monthly payments would be lower, although overall interest paid would be higher. Meanwhile, the Toronto Real Estate Board warns that a decline in the real estate market could result in a multi-billion dollar hit to the economy and bleed into other sectors, such as employment.