As the number of real estate transactions soared across Canada, continued low-interest rates enabled a wide array of purchasers to enter the fray. Accordingly, we have seen single-month price appreciation of detached homes as high as 8% and year-over-year increases over 25%.
We spoke to Nest Mortgage Owner and Mortgage Specialist, Scott Gingles, about how the situation originally developed and continues to evolve; changes proposed by the federal government to cool the market; as well as what this all means for potential consumers.
“Lowering of interest rates and subsequent quantitative easing efforts were not intended to support and stimulate real estate specifically. It was to backstop the broad spectrum of industry and to stimulate the Canadian economy as a whole,” said Gingles, adding regardless, the historically low-rate environment has thrust many idle purchasers into action — particularly those sitting on extra savings because of their decreased spending over the last 12 months.
Unfortunately, due to limited housing availability stemming back to the development slump prior to the start of the pandemic, demand has erupted across the country: robust national sales have increased the average sale price by 32% year-over-year as of March according to Gingles.
The scenario is unlikely to change in the immediate future as a new element has recently come into play. Earlier in April, OSFI proposed changes to the mortgage stress test requirement (mandatory for federally-regulated banks but not credit unions or alternative lenders) effective June 1, which determines the level of mortgage an applicant can qualify for. Currently set at 4.79%, the rate will increase to either 5.25% or the contract rate plus an additional 2%, whichever is higher.
So how does this affect homebuyers?
“If you've secured a purchase contract prior to June 1st, historically speaking you should be grandfathered under old qualification guidelines, meaning the previous stress test would apply. With rates remaining low, continued supply concerns and heightened demand, there will be added pressure to lock down a purchase before the deadline, [the outcome is quite obvious],” Gingles said.
For many, it will be harder to get approved for a mortgage post June 1st. At today’s rates, OSFI’s proposal theoretically cuts borrowers’ buying power by roughly ~4%. It’s considerable given the average Canadian home price today. One window of opportunity may be the pre-sale market if you want to avoid the highly competitive, often multiple offer, resale environment – it is a more transparent buying environment.
What about the Bank of Canada?
One more significant news item reported last month concerns the Bank of Canada, announcing that contrary to popular belief interest rates would remain unchanged in the interim.
“The Bank has recognized that the economy is performing better than expected and have bumped up their prediction of when rates might start to increase (in the latter half of 2022). There are a lot of variables and macros that are constantly evolving. For example, the COVID-19 factor, and the impact on inflation and employment. All of these variables will have an influence on whether rates will increase, remain flat, or even decrease,” said Gingles.
“The Bank of Canada changes its mind a lot, so depending on economic results and those variables I just mentioned they may extend or shorten their prediction over the remaining five updates this year. If we had a crystal ball it would be a very different environment.”
Contact Nest Mortgage to understand what you qualify for today, and how the regulation changes may impact you in the future.
By MLA Contributor Benjamin Yong