Not so fast

Are you a realtor worried about the next Audi lease payment? Are you relieved to know the feds’ fancy new First Home Savings Plan is launching in a hundred days? And convinced that miserable mortgage stress test will soon be gone? No more 7% hurdle for newbie buyers?

Well, fuhgeddaboudit. Everything just changed.

First, read this memo, sent internally at one of the country’s largest financial institutions. Seems the FHSA – that incredibly generous new tax shelter – won’t be materializing any time soon.

Although these accounts are scheduled for launch on January 1st, 2023, insufficient information has been provided by the CRA on what reporting specifications will be required by them to track and monitor these accounts through requisite file submissions from the entities that offer them.  Without the end-to-end specifications being confirmed and/or obtained the development teams charged with setting up these accounts we don’t know what to build and cannot proceed.  In summary, the industry is still waiting for further guidance from the CRA to begin this process so it is anticipated to be several months beyond the intended launch date before these accounts become available at any financial institution in Canada.

This is not the news the housing industry was hoping to hear. As we’ve detailed, the FHSA is quite the creation – allowing eight grand a year to be totally sheltered from tax (like a TFSA), but also churning out a deduction from taxable income (like a RRSP). Money can grow tax-free, be withdrawn tax-free (so taxpayers subsidize it) and used to buy a house which can generate tax-free capital gains. And if you stay houseless, the money can transfer, tax-free, into a tax-sheltered retirement plan. In short, it’s a gift. But it’s not coming any time soon, apparently.

So how about the stress test? Surely that sucker will be ghosted.

After all, the regulation requires all borrowers to earn enough income to qualify for a mortgage at the higher of (a) 5.25% or (b) the rate the lender is offering plus 2%. Now that the Bank of Canada meanies have jacked rates five times, five-year mortgages at the Big Six are running at around 5.2%. The stress test has turned into a towering obstacle to house lust. It punts a lot of would-be buyers and drops the amount of financing many others qualify for. The intent was to shield people from rate hikes. Now that 1.5% loans have turned into 5% ones, it helps depress the market.

Days ago the Toronto real estate cartel joined a chorus of voices begging for the test to be dumped. Here’s what the local Chief Wizard, John DiMichele, had to say:

The Office of the Superintendent of Financial Institutions (OSFI) should weigh in on whether the current stress test remains applicable. Is it reasonable to test home buyers at two percentage points above the current elevated rates, or should a more flexible test be applied that follows the interest rate cycle? In addition, OSFI should consider removing the stress test for existing mortgage holders who want to shop for the best possible rate at renewal rather than forcing them to stay with their existing lender to avoid the stress test. This is especially the case when no additional funds are being requested.”

Now we know the answer. OSFI says phooey.

The boss there is Peter Routledge. In a speech he has just made this commitment: “The uncertainty and anxiety caused by a rising interest rate environment have, understandably, caused some Canadians to advocate for a loosening of the underwriting standards in Guideline B-20 [the stress test]. Let me reassure those of you who oppose a loosening of underwriting standards that OSFI will not do that.”

So the test remains. When the Bank of Canada raises its rate again on October 26th (and presumably on December 7th) the qualifying rate will increase, along with Government of Canada bond yields and the cost of five-year mortgages.

Well, so much for realtor relief.

Now what’s happening to the market, coast-to-coast?

We’ll continue to monitor that for you. But here’s a glimpse. In Kelowna, for example, this report: “We are almost half way through this crash and prices are expected to bottom in May of 2023 and then trade sideways for well over a decade.” The peak-to-trough average detached price that hit $1.26 million in March, 2022, would then be $786,000 next May. Ouch.

Source: RE Analytics, The Kelowna Real Estate Report

In Toronto, Altus Group just found that a third of all developers are halting or pausing condo construction projects – eliminating about 10,000 units. This comes after the province of Ontario said 1.5 million new homes are required within ten years – a goal that is instantly unattainable since it would require a doubling of production, not a pause.

Economists tell us it takes a year, at least, for the effect of rate hikes to ripple through society. Alas, we have but begun.

About the picture: “Hello Garth, Thank you so much for changing our financial situation,” writes Anne. “I’ve been reading your blog for years. Here is a picture of Lucy, my friend’s darling 9 yr old Labradoodle. Together we all love to walk every summer, all summer on Savary Island, enjoying beaches and forest trails. Lucy loves to show off her competence with her agility, and then receive the expected treat.”