Photo: James Bombales

The big story for the Canadian housing market in 2018 was a new mortgage stress test for uninsured buyers. Sales plummeted when it was first introduced by the federal government in January, and have to yet to return to their 2017 highs, despite balancing out over the course of the summer.

The test requires all uninsured mortgage borrowers to qualify against the Bank of Canada’s five-year benchmark rate, or at their contract mortgage rate, plus an additional 2 per cent. Many would-be buyers have found themselves unable to pass the test, placing downward pressure on the housing market.

While many industry watchers are now focusing on the impact of higher interest rates on the market, the stricter qualification rules will continue to weigh on housing activity in the new year.

It’s worth considering the specific ways the test will affect sales and prices in the months to come — read on for a closer look at what the now year-old policy will mean for the housing market in 2019.

Home prices will continue to struggle

The average sale price for a home dropped across the country in 2018, thanks in no small part to the stress test. According to the 2019 RE/MAX Housing Market Outlook, the average sale price for a Toronto home dropped 4 percent from $822,572 to $789,181 over the past year.

“Rising interest rates and the stress test continue to make it difficult for prospective buyers in…Ontario communities,” RE/MAX representative Cameron Forbes tells Livabl.

The test is also predicted to weigh on price growth in western markets in the new year. While the average price of a BC home increased by 6 percent year-over-year in 2018, it’s forecasted to decrease by 3 percent in 2019, according to RE/MAX.

Meanwhile, the Calgary market is projected to remain relatively flat, thanks to volatile oil prices and the downward pressure of the test.

“Our forecast indicates that the stress test will continue to keep some buyers out of the market in the new year, which should put a damper on prices in most markets,” says Forbes.

Alternative lenders will continue to attract new business

Industry professionals have long warned about the risks posed by private mortgage lenders. But, for those unable to pass the stricter mortgage qualification rules at work at the big banks, it may be the only option.

In a recent report, the Chartered Professional Accountants of Canada (CPA), noted the rise of non-regulated lenders over the course of 2018, and cautioned that it could become an issue if the trend continued into the new year.

It echoes the sentiments of John Pasalis, the president of online real estate brokerage Realosophy, who found that private lenders accounted for 20 percent of Toronto mortgage refinancing deals in the second quarter of 2018, up 67 percent over the past two years.

“Homeowners struggling to make ends meet today need a plan that does not include turning to high interest private debt,” he writes, in the report. “In this late stage of Canada’s housing and credit cycle where house prices are moderating and interest rates are rising it’s not the time to be increasing your overall debt load — it’s time to deleverage.”

But Pasalis also acknowledges that, as buyers in Canada’s priciest markets continue to struggle to pass the test, it’s likely that the trend will continue in 2019.

The issue will be exacerbated by higher interest rates

When it comes to the issue of housing affordability, the mortgage stress test is often mentioned in the same breath as higher interest rates.

That’s because, when it comes to the budgets of would-be home buyers, the two are linked. Higher interest rates mean banks hike mortgage rates, so that even buyers able to pass the stricter stress test may find themselves unable to keep up with ongoing hikes.

The Bank of Canada raised the overnight rate to 1.75 percent in October, and most economists predict two-to-three additional hikes in the new year.

“It’s difficult to identify how much of the recent slowdown in housing activity has been due to tighter mortgage rules versus higher interest rates,” wrote CIBC economist Royce Mendes, in a recent note. “But, based on prior estimates of the effects of the rule changes alone, the slowdown in lending has been more precipitous.”

Mendes says that, now that many mortgages are rolling over at higher rates for the first time in 25 years, the market will see some serious downward pressure in 2019.

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