The impact of the B-20 stress test has been very significant and continues to be felt in all corners of the housing market. As expected, the new mortgage rules distorted sales activity both before and after implementation. According to TD Bank economists in a recent report, "The B-20 has lowered Canadian home sales by about 40k between 2017Q4 and 2018Q4, with disproportionate impacts on the overvalued Toronto and Vancouver markets and first-time homebuyers...All else equal, if the B-20 regulation was removed immediately, home sales and prices could be 8% and 6% higher, respectively, by the end of 2020, compared to current projections."
According to Rate Spy, for a borrower buying a home with 5% down, today’s drop in the stress-test rate means:
- Someone making $50,000 a year can afford $2,800 (1.3%) more home
- Someone making $100,000 a year can afford $5,900 (1.3%) more home
(Assumes no other debts and a 25-year amortization. Figures are rounded and approximate.)
For a borrower buying a home with 20% down, today’s drop in the stress-test rate means:
- Someone making $50,000 a year can afford $4,000 (1.4%) more home
- Someone making $100,000 a year can afford $8,300 (1.4%) more home
(Assumes no other debts and a 30-year amortization. Figures are rounded and approximate.)
Bottom Line: Almost no one saw this coming due to the stress test rate's obscure and arcane calculation method (see Note below). This 15 basis point drop in in the qualifying rate will not turn the housing market around in the hardest-hit regions, but it will be an incremental positive psychological boost for buyers. It should also counter, in some small part, what’s been the slowest lending growth in five years.
Note: Here's the scoop on why the qualifying rate fell. According to the Bank of Canada:
“There are currently two modes at equal distance from the simple 6-bank average. Therefore, the Bank would use its assets booked in CAD to determine the mode. We use the latest M4 return data released on OSFI’s website to do so. To obtain the value of assets booked in CAD, simply do the subtraction of total assets in foreign currency from total assets in total currency.”
The BoC explains further:
“Prior to July 15th, we were using April’s asset data to determine the typical rate as that was what was published on OSFI’s website. On July 15th, OSFI published the asset data for May, and that is what we used yesterday to determine the 5-year mortgage rate. As a result, the rate changed from 5.34% to 5.19%.”
Manager Mortgage Specialist