The Condo Buyer’s Study Guide to the OSFI Stress Test


The Office of the Superintendent of Financial Institutions (OSFI) recently finalized its new B-20 guidelines, which will have long-term effects on Toronto’s housing market—and condo investors.

In other words, you and me.

So, let’s get to the bottom of these new regulations—specifically the stress test, figure out how they’ll affect the condo market, and what this means for us.

The changes

The biggest development, and you’ve probably already heard all about it, is the stress test, which will make it more difficult for homebuyers to qualify for a loan. It’s by no means new.

In October 2016, a stress test was added to insured mortgages. In July 2017, OSFI released a draft of new changes to its B-20 guidelines for public consultation—including a stress test for uninsured mortgages. This draft has just been finalized and will be implemented at the beginning of 2018. Just recently, the Globe reported that some lending institutions could impose the rules as early as November, so heads up.

You’re probably wondering: why all the new regulations? Regulators say it’s to curb growing household indebtedness in markets with high property values, i.e. Toronto. Given rising interest rates, the idea is to mitigate some of the risk in the market. And to cool it of some, too.

Okay, now that that’s out of the way, here are the deets. The stress test will require applicants putting a down payment of over twenty percent on a home to qualify at a rate two percent higher than the Bank of Canada’s official lending rate.

Why two percent? To cover the probable increase in interest rates. Should rates change more dramatically, there’s a good chance this could be revisited, but for now it’s the law of the land.

The stress test will lower home buyers’ purchasing power. According to Ratehub, who crunched the numbers, right now a family with a yearly combined income of $100,000 can afford a $726,939 home, assuming a twenty-percent down payment at the five-year fixed rate over twenty-five years.

On January 1, 2018, with the new stress test in place, that same family will only be able to afford a $570,970 home, which—as we all know—doesn’t exist in Toronto. In fact, at the moment of writing this, resale condos are going for $550, 766 on…

In an interview with BNN, Will Dunning, Chief Economist to Mortgage Professionals Canada, noted that up to 16% of current mortgage holders wouldn’t pass the stress test. In other words, a lot of people. The question begs, what happens to purchasers who can’t qualify come 2018? Do they turn to unregulated lenders? Look for properties in less expensive markets? Or shift markets altogether?

Enter condos…

Okay, this is our cue.

Condos are cheaper than detached homes. Dramatically. And right now, as I’ve already written, Toronto is having something of a pre-construction renaissance. Pretty timely that an increase in new condo stock should coincide with the stress test, which might force some homebuyers to shift to more affordable markets.

Figuring out whether buyers decide to go the condo route in light of changing mortgage rules and, if so, how many, is nigh impossible. But it’s something to consider. It’d definitely drive demand for Toronto’s pre-construction and resale condos. It could also impact prices and buyer competition—so definitely something to watch out for.

Another variable to consider: renters. With it being harder to secure a loan, there’s a good chance renters will be holding pat—at least until house prices become more reasonable and mortgages more attainable.

Now what?

Given the relative affordability of condos, buyers looking to enter the condo market should mostly be unaffected by OSFI’s stress test.

If anything, condos are poised to become an even hotter commodity given how accessible they are. This is especially true for first-time buyers. I imagine this’ll likely be the biggest segment of buyers to shift into the condo market in the coming years.

One thing’s for sure: there’s plenty of uncertainty in the freehold market right now. Condos, in the meantime, continue to perform.

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