Despite calls from the real estate and mortgage industry to relax mortgage stress testing in Canada, the country’s most active housing market has pulled off an impressive feat, one economist suggests.
In a note to clients this week, BMO Senior Economist Robert Kavcic lauded the Toronto housing market for its performance in August, when sales were up 13.4 percent.
“The level of activity is almost bang on the 10-year average,” Kavcic points out.
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Kavcic also notes that another important metric of housing market health — the seasonally adjusted sales-to-new listing ratio — is hovering around 60 percent, reflecting a balanced market.
The ratio suggests that six homes are sold for every 10 that are listed. Experts consider ratios between 40 to 60 percent to suggest balanced conditions, while anything above is a seller’s market and anything below favouring buyers.
“So far, this is a near-perfect landing from a policymaker’s perspective, and the Bank of Canada doesn’t seem too worried about stoking another positive run,” Kavcic says.
In January 2018, policymakers introduced mortgage stress testing for uninsured mortgages. The testing required borrowers with downpayments of 20 percent or more — and who therefore don’t require mortgage insurance — to qualify at a rate 200 basis points higher than their bank offers on contract.
Similar testing had already been in place for the insured mortgage segment since 2016, and prior to the policy expansion in 2018, some homebuyers had been finding ways to make a larger downpayment and avoid the test.
The very month the new stress test came into effect, Toronto home sales plunged 22 percent on a year-over-year basis, so some observers, including Kavcic, are encouraged by the recent pickup in transactions.
Toronto isn’t the only city adjusting to the new credit climate, although it is faring better than another key market, Vancouver.
“As expected, that market is taking longer to balance out than Toronto, but slow progress continues,” Kavcic concludes.