Stress test for uninsured homebuyers will test housing market

New guidelines were introduced for mortgage lenders this week, and among the rules, a stress test for uninsured borrowers was introduced.

David Gray of the Calgary Eyeopener spoke Thursday to Garth Turner, a former Conservative MP who writes about finance and real estate on the blog greaterfool.ca.

This interview has been condensed for clarity and length.

Q: Now there's a stress test. What's this all about?

A: It's pretty simple. What the regulator is trying to do is protect the banks, not really do anything for real estate buyers. The trouble really emerged last year when they brought in a stress test for first-time buyers to make sure they could afford higher interest rates. Well it was a pretty serious stress test — and a lot of people didn't want to take it. So instead of getting insured mortgages, which meant they had to have the test, they found a 20 per cent deposit [downpayment], which meant they could avoid it.

A lot of people got the deposits from the Bank of Mom, or a sub prime lender — so it didn't really mean they had the financial means. So they got around the test! All of a sudden, the banks realized, oh my god, we've got all these mortgage borrowers now who aren't that great financial risks, and we don't have their mortgages insured.

Q: What did they do?

A: The bank regulator took action, in saying, you know what? The way around this is, everybody is going to have to take this [financial stress] test. And David, it's a pretty serious one. It means mortgages are basically going to five per cent, effective January 1, and never going below that. The irony is we're going from 2 per cent mortgages last April to five per cent in January, and we've never seen an increase like that. Ever. So it's going to have an impact.

Q: Did the banks do that to protect themselves from buyers or do they do it to protect themselves from themselves?

A: That's a great point, David. The banks are competitive. They're all out there trying to get mortgages, trying to do business, and therefore, one bank said no, we're going to have a more stringent requirement for borrowers. If that happened at RBC, everyone would go to Scotia. So now the bank cop having done this for everybody — they're all onboard, they love it, because it's a level playing field for them, but it still brings risk down.

Q: What's the downside?

A: The trouble on the buyer's side is that it's going to mean less credit, because when people have to qualify at a much higher rate, well, people now don't qualify for as much borrowing. So it's estimated a family with 20 per cent to put down, that [once] might have been able to buy a home for $725,000, now will only be qualified to buy one at $570,000 — so that's a serious, serious drop.

Now the laws of supply and demand being what they are, if that's where people qualify, then the price of homes is probably going to drift down to that new level. After all, it was cheap money that took those prices up. So when money gets more expensive, prices come down.

Q: Could this mean lower housing prices in Calgary?

A: Yes. Calgary is actually one of the more at-risk markets. Prices in Calgary have drifted down anyway over  the last couple years. It's not as dramatic as people thought with the oil price collapse in 2015, but still. Everybody's got kind of a nice home in most of the suburban areas of Calgary that's worth less than it was three years ago. There's no doubt about it.

But they're going to be worth less than that now, especially since the price of oil has hardly budged over 50 bucks — it's been a long time in this zone. The commercial real estate market in downtown Calgary is a bit better, but it's still awful.So there's a lot of negative momentum in real estate in general in Calgary, and I think this is going to exacerbate it.

Q: The message to them [uninsured homebuyers] is your money's not good enough for us? From the banks? Is that really what they're saying?

A: Sort of. We care more about your ability to carry this home, not the fact that you plunked a bunch of money down. It really doesn't matter how big a downpayment anyone has now. It's all about the ability to carry.

The best advice right now is if we have this thing happening on January 1 — we know it's going to reduce credit and reduce prices. No. 1: Why on earth would anyone buy a home now, because there's a very good chance that a year from now, prices will drift down. So why would you spend more now? Just to get a cheaper mortgage rate because you're going to have more debt? That makes no more sense.

No. 2: Generally, if you want to have a home, and you can afford a home, and it's not putting all your net worth in one place, and you need a house, then go buy one. Just be aware of the fact that this is not an investment anymore, it's a place to live. And you've got just as good a chance of losing money on it as you do of making money.

Q: If millenials want to do something to improve credit score, what do they do? Is there some kind of work around?

A: They can't. David, that's why this thing is so consequential. There is no work around. It doesn't matter how much money you get to put down, you've still got to pass the test. It doesn't matter if you want to take out a long-term mortgage or short-term mortgage. You still have to pass the test at the high rate.

So no, I think it's definitely a market leveler. We'll just to have to wait and see. If we have this conversation one year from now, we're certainly going to be talking about the results — and they're not going to be positive.

With files from the Calgary Eyeopener

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