Qualifying Mortgage Rate Falls For First Time Since B-20
 
 

The interest rate used by the federally regulated banks in mortgage stress tests has declined for the first time since 2016, making it a bit easier to get a mortgage. This is particularly important for first-time homeowners who have been struggling to pass the B-20 stress test. The benchmark posted 5-year fixed rate has fallen from 5.34% to 5.19%. It’s the first change since May 9, 2018. And it’s the first decrease since Sept. 7, 2016, despite a 106-basis-point nosedive in Canada’s 5-year bond rate since November 8 (see chart below).

Five-Year Canadian Bond Yield

 
 

The benchmark qualifying mortgage rate is announced each week by the banks and "posted" by the Bank of Canada every Thursday as the "conventional 5-year mortgage rate." The Bank of Canada surveys the six major banks’ posted 5-year fixed rates every Wednesday and uses a mode average of those rates to set the official benchmark. Over the past 18-months, since the revised B-20 stress test was implemented, posted rates have been almost 200 basis points above the rates banks are willing to offer, and the banks expect the borrower to negotiate the interest rate down. Less savvy homebuyers can find themselves paying mortgages rates well above the rates more experienced homebuyers do. Mortgage brokers do not use posted rates, instead offering the best rates from the start.
The benchmark rate (also known as, stress test rate or “mortgage qualifying rate”) is what federally regulated lenders use to calculate borrowers’ theoretical mortgage payments. A mortgage applicant must then prove they can afford such a payment. In other words, prove that amount doesn’t cause them to exceed the lender’s standard debt-ratio limits.

The rate is purposely inflated to ensure people can afford higher rates in the future.

 
 

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%.”



Simon Wong
Manager Mortgage Specialist
simonwongmp@gmail.com


 
 
 
 
 
 
 
 
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The Metro Vancouver resale real estate market is primed for a comeback!

Never have we seen the market with sales and listings numbers like we are experiencing right now. Even with monthly sales below that of a typical May and the 10-year average, fundamentals shown by new and active listing counts that there is significant confidence. And with sales in May 44% above those in April, it’s not a slumping market, but one with a gasp of breath! Ask REALTORS® how many multiple offers they have experienced in the last month. Supply is the story!

The market is always right—supply and demand ultimately dictates it and the recent intervention on the demand side by the provincial government through taxes and the federal government through the stress test only serve reduce prices significantly in the high end for those the government wanted out of this market and prevent home buyers from getting into homes in the bottom end—affordability has not improved and will not get any better without a serious look at the supply side.

Supply Side of the Equation Continually Ignored!

Supply of homes will continue to be an issue without being addressed by government at all levels. With increased taxes, costs and restrictive zoning, developers are pulling back and we’ll see a lack of new supply and especially the right supply in the next 2 to 3 years. That coupled with low resale inventories now, significant pent up demand, a growing population and Metro Vancouver being a region where people gravitate to, the cycle will continue with demand outstripping supply and prices rising.

When you look at the numbers, we’ve seen 3 previous significant slow downs in Vancouver real estate. During 1997 to 1999, 2008 to 2009 and 2010 to 2013 home sales in Greater Vancouver persisted below 2,000 units. In each of those first two periods, there were over 20,000 listings and close to it in the last. This recent slow down we’re seeing the market struggle to get over 15,000 active listings—at a time when the overall housing stock is at it’s highest!

The lack of homes listed during one of the slowest markets we’ve encountered in 30 years shows that sellers are not looking to “panic sell”—some will sell out of need and agree to prices below what they would like, others will hold and wait.

There is confidence in the Metro Vancouver real estate market—with more buyers and fewer sellers, it will lead to stabilization in the market.

We may be seeing prices bottom out in the lower and middle end of the market, but there are still great opportunities for buyers, but they are diminishing.

Since Dexter Realty released Kevin’s analysis of recent sales data, news outlets are taking note and the story being told is starting to change. The Daily Hive has already posted their own article on Metro Vancouver’s real estate, drawing heavily upon Kevin’s expertise. The the Vancouver Courier, Business in Vancouver and Western Investor have done articles as well. We won’t be surprised to see even more outlets following soon following suit.

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The speculation and vacancy tax is a key measure in tackling the housing crisis in major urban centres in British Columbia, where home prices and rents have skyrocketed out of reach for many British Columbians.


The provincial government is taking action because people who live and work in B.C. deserve an affordable place to call home. This new annual tax is designed to:


  • Target foreign and domestic speculators who own residences in B.C. but don’t pay taxes here
  • Turn empty homes into good housing for people
  • Raise revenue that will directly support affordable housing


The tax applies to residential properties in Capital Regional District (Victoria), Metro Vancouver Regional District excluding Bowen Island, Village of Lions Bay but including the University Endowment Lands and UBC, City of Abbotsford, District of Mission, City of Chilliwack, City of Kelowna and West Kelowna, City of Nanaimo and District of Lantzville


The tax will 0.5% for 2018 and 0.5 for Residents of British Columbia and Canadian Citizens and 2% for Foreign Nationals in 2019 and going forward from there.


All residential property owners on title in designated taxable regions of B.C will have to complete an annual declaration for the Speculation and Vacancy Tax to claim any relevant exemptions. Where there are multiple owners of a home, a declaration must be completed by each owner.


For more information and exemptions see the link below: 

https://www2.gov.bc.ca/gov/content/taxes/property-taxes/speculation-and-vacancy-tax


Vancouver Empty Homes Tax


  • The City of Vancouver Empty Home Tax "EHT" became effective January 1, 2017. The Empty Home Tax is applied annually with the first taxation year beginning January 1, 2017. The tax for 2017 was payable by April 2018. The tax rate is 1% of the assessed value based on the assessment in the year the tax is paid. For 2019 the tax if applicable will be due by April 12, 2019.

  • The EHT does not apply to a home used as a principal residence or is subject to a long term tenancy agreement of at least 180 days accrued in a calendar year with a minimum of 30 day terms for the tenancies.

  • There are various exemptions for the EHT for situations such as major renovations, major illness, death of the owner, ownership of the property changed curing the previous year, strata rental restrictions that were in place prior to November 16, 2016, homes used for work orders, homes subject to a court order. Explanations for these can be found on the City of Vancouver website https://vancouver.ca/home-property-development/will-your-home-be-taxed.aspx
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The data relating to real estate on this website comes in part from the MLS® Reciprocity program of either the Real Estate Board of Greater Vancouver (REBGV), the Fraser Valley Real Estate Board (FVREB) or the Chilliwack and District Real Estate Board (CADREB). Real estate listings held by participating real estate firms are marked with the MLS® logo and detailed information about the listing includes the name of the listing agent. This representation is based in whole or part on data generated by either the REBGV, the FVREB or the CADREB which assumes no responsibility for its accuracy. The materials contained on this page may not be reproduced without the express written consent of either the REBGV, the FVREB or the CADREB.