A growing number of young Canadians are acclimatizing themselves to the idea that they will never end up owning a home and remain permanent renters — but the reasons are less to do with property prices than they are with the difficulty in obtaining a mortgage to begin with.
That’s the conclusion reached by Mortgage Professionals Canada — the primary industry group representing mortgage brokers — in a new report that assesses the state of the housing market in Canada since strict new lending rules took effect in early 2018.
“We are still seeing a high level of desire in home-buying, especially among young people aged 25 to 34,” said Paul Taylor, President and CEO of Mortgage Professionals Canada. “Whether they will be able to make that purchase may be an entirely different matter.”
The report paints a rather alarmist portrait of the impact mortgage “stress tests” have had on the ability of the average Canadian to qualify for a housing loan. For instance, the analysis indicates that 18 percent of prospective homebuyers who could currently afford their “preferred purchase” would in fact, fail a mortgage stress test, and require close to $29,000 more to be able to qualify to obtain a loan.
“We estimate that to this point, about 100,000 Canadians have actually been prevented from buying a home as a result of stress testing now required by the federal government (even though they could have afforded to buy based on their actual circumstances),” the report wrote. In a similar report written last month, Will Dunning, the Chief Economist of Mortgage Professionals Canada called the mortgage stress tests “truly stupid” and “unnecessarily and ridiculously dangerous to the economy.”
New mortgage rules introduced by the federal government in two phases — last fall, and then again in January 2018 — required that all prospective borrowers be assessed on their ability to meet mortgage payments on an interest rate two percent higher than the current rate. So for instance, if your salary qualified you for a fixed mortgage of 2.99 percent, it would now also have to qualify you for a mortgage rate of 4.99 percent.
But redirecting blame at new lending rules as the reason why many people are giving up on home ownership, is perhaps misguided. Ottawa instituted strict mortgage requirements precisely because the housing market was too hot and Canadians who had been overborrowing in an era of low interest rates, were not prepared for rates to start rising.
Since the early 2000s, home prices in major Canadian cities have skyrocketed at a pace that has priced even middle-class earners out of the market. At the same time, incomes have remained the roughly the same, seeing only inflationary increases. Indeed, the Mortgage Professionals report points out that since 2000, house prices in Canada have “tripled on average, growing twice as quickly as incomes”.
In fact, according to data in the report, almost 40 percent of those surveyed in the 18 to 34 age cohort concluded that they haven’t bought a home yet not because of stricter mortgage rules, but because they “need more time to save up for a down payment.” to begin with. That percentage only went down marginally amongst those aged 35 to 54 — 31 percent said they needed more time to save — indicating the struggle many Canadians are still facing to afford a home, despite years of being in the workforce.
The average house price in Toronto is approximately $830,000, as of June 2018, a far cry from the $1.2 million figure at the height of Toronto’s real estate boom in early 2016. But $830,000 is still a hefty figure — one would have to save up at least $58,000 (based on CMHC's minimum lending guidelines for loans over $500,000) in order to even begin the mortgage process. And the lower the downpayment the more scrutiny one’s income is subject to.
The other big reason for not owning a home, according to the report, is a lack of financial or employment stability. It’s a concern that seems to be spread equally across all age cohorts, with approximately 22 to 24 percent of Canadians feeling that if they had a more secure job or a steady income, they would be more likely to purchase real estate.