Impact of New Stress Test Unclear

As of today I have been unable to find any truly analytical assessments or forecast of the impact of the new stress for the housing market, especially here on the Island. The new 2018 stress test applies to mortgages with 20% or more down payment. Reaction from industry experts was somewhat alarmist with opinions that this was not needed or has gone too far. 

This article in the Huffington Post reports an estimation from a mortgage professional that the new measure will reduce unit sales by 10-15%. It also states that according to estimates from DBRS (a credit rating agency) 46% of mortgages have 20% or more down payment. This article headline states "War on First-Time Homebuyers." While I do not have any stats on the matter, I tend to believe that the 2016 stress test, for mortgages with less than 20% down payment, would impact first time buyers harder than the 2018 stress test.

The Financial Post states a report from TD "said the stress test will likely further slow housing activity, depressing demand by five per cent to 10 per cent once implemented on Jan. 1, 2018." It further notes that the stress test does not apply to non-federally regulated lenders, such as Credit Unions. Whether provincial regulators will follow suit, or lenders such as Credit Unions will adopt the stress test, is unclear at the moment. This article also mentions a "loophole" in that the stress test does not limit the amortization period to 25 years, which may lead to some lenders increasing the amortization period to 35 years.

A few other negative impacts are worthy of mention.

  • Home owners looking to consolidate high interest debt to their mortgage may not qualify.
  • Buyers may move toward lenders that are not required to enforce the test, at higher interest rates.
  • The test does not apply to renewing mortgages with the same lender, thereby eliminating choices for home owners who may want to shop for better rates when renewing.
  • Longer amortization periods results in higher interest costs.

Assuming those buying for retirement tend to have 20% or more down and first time buyers tend to have less than 20% down, and a look at the profile on buyers on the Island, may explain why the 2016 stress test had little impact here. In 2016 in the Comox Valley 55% of buyers purchased for retirement and 14% were first time buyers.  For the VIREB Board area (Malahat north) the numbers are 57% and 16% respectively. Purchases for retirement have steadily increase in the last 10 years.  See this graph for Campbell River, Comox Valley and Board area.  In 2007 purchases for retirement were 21% for Campbell River, 36% for the Comox Valley and 35% for the Board area.

Given this buyer profile with a high number of retirees it seems reasonable that the 2018 stress test will have a larger impact here on the Island than the 2016 stress test, potentially leading to decreased demand and increased inventory levels. Current inventory (number of active listings) for single family homes are less than 50% of the 2008 to 2014 average.  See Graph for September inventory levels for the Comox Valley and the Board area.

If demand is depressed by the 2018 stress test and inventory levels do start to recover, we may see the rate of price increases level off here on the Island. Price increases are at 10-20% over the last 12 months depending on area. I believe it would take other dramatic factors, economic, financial or political, which are possible, before we see prices dropping in the major markets (Duncan to Campbell River). This is a personal opinion. When forecasts become available I will post them here and under Market Update.

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