The Biggest Housing Changes in Canada in the Last 4 years

As the federal election approaches this fall, many people are discussing the last four years. We’ve seen our fair share of changes in that time, and the housing market is no exception. Housing affordability is a major concern for many Canadians – and rightfully so.

The facts speak for themselves: in 1980, the average home price in Canada was about five times the average income; today, it’s about 10 times as much.

The high cost of real estate makes it tough to afford a home in pricey markets like Toronto and Vancouver. So, has the housing market gotten any better over the last four years? Let’s take a look at the two major changes to the housing market during this time to see if homebuyers have benefited.

The Mortgage Stress Test

The mortgage stress test is the most well-known change in the housing market, and it’s been a popular topic of discussion at dinner parties and barbecues. You may have heard of the stress test, but do you really understand what it means?

The federal government introduced the stress test in two stages between 2016 and 2018. In a nutshell, the stress test made it more difficult to qualify for a mortgage when applying with a federally regulated lender. The goal was to limit the amount of money homebuyers could borrow; they did this by making borrowers qualify at a rate that was higher than the actual mortgage rate offered by banks. This lowered the amount borrowers could qualify to buy a home, and it forced them to adjust their home-buying expectations. For example, some homebuyers are choosing to buy less-expensive homes, while others are buying more-affordable options – like townhouses or condos – instead of houses. Some homebuyers have even decided to postpone their plans to purchase a home altogether.

The stress test was implemented in two stages. The first stage came into force in October 2016 with a limited scope. This version of the stress test targeted buyers who put down less than 20% on a home. These homebuyers already have to buy mortgage default insurance, so this change further reduced the amount of money that they could borrow for their mortgages. The goal of the stress test is to ensure that you would be able to afford higher payments if your mortgage were renewed. At this stage, you have to qualify at your mortgage rate or at the Bank of Canada’s benchmark interest rate (currently at 5.19%), whichever is higher.

In January 2018, the second stage of the stress test went into effect for those making a down payment of 20% or more. Under this stress test, borrowers need to demonstrate that they can afford the Bank of Canada’s benchmark interest rate or their mortgage rate plus 2% – whichever is higher.

Although there’s no denying that the stress test has made it more difficult to qualify for mortgage – especially in cities like Toronto and Vancouver, where home prices are the highest in the country – one could argue that it has also helped homebuyers. The appreciation of home prices has slowed considerably since the stress test was introduced; we’re no longer seeing double-digit home price appreciation in the aforementioned housing markets. And, although home prices haven’t come down 20-25% as some had predicted, the slower appreciation has given homebuyers a chance to save money as they try to keep up with these costly housing markets.

If the federal government was hoping to slow home prices with the stress test, it has succeeded. The stress test, combined with changes at the provincial level, have helped slow home prices for the time being. Hopefully, first-time homebuyers now have a chance to get into the real estate market.

Although it remains to be seen whether this is just a brief pause before home prices keep going up, homebuyers have also started to get more creative in qualifying for mortgages. For example, parents continue to gift down-payment money to their children or co-sign on mortgage loans. And, others opt to buy a home with someone else as a co-applicant. Considering at least one of these alternatives can help counteract the effects of the mortgage stress test.

Shared Equity Mortgages

However, the federal government wasn’t finished when it introduced the stress test. More recently, it announced the First-Time Home Buyer Incentive (also known as shared-equity mortgages). The government touted it as the ideal program to help those struggling to enter the housing market. But, does it really help that much? Let’s take a closer look.

Set to launch on September 2, 2019, the incentive allows homebuyers to secure smaller mortgages with more affordable monthly payments; this is accomplished through down-payment funding from the government. Depending on whether you’re buying an existing or new home, you may be eligible for a top-up of 5% or 10% on your down-payment funds.

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