Broker says addressing the difficulty of putting together a downpayment should be policymakers’ first concern on housing
Canada’s housing market has been gripped by an affordability crisis for years – and while successive federal and provincial governments have put forward plenty of proposals to ease those challenges, there’s little sign of a meaningful and lasting shift for homebuyers.
Even though prices have been on the wane across many cities, affordability is actually worsening in most, according to a recent Ratehub.ca analysis that showed the required income to purchase a home jumped in 11 of 13 major markets in June.
Federal and provincial authorities’ most recent gambit in the housing market, a bid to snap up unsold condos in British Columbia and convert them to rent-to-own units, has been met with a tepid response in the mortgage industry.
And some commentators say the housing crisis won’t be resolved without a laser focus on the main problem: the fact that eyewatering home prices are making it almost impossible for many buyers to put together the money needed.
That’s particularly true in markets like Toronto and Vancouver, where average prices remain well above what many buyers – particularly those purchasing for the first time – can afford.
“The average first-time homebuyer I’m talking to, their biggest struggle is one of two things,” Alex McFadyen (pictured top), founder of Flow Mortgage Co. in BC, told Canadian Mortgage Professional. “Qualifying for the amount of income required for the value of the home, and acquiring a sufficient downpayment.”
Is it time for changes to the stress test?
McFadyen pointed to Canada’s mortgage stress test as the first aspect of the current market that could warrant review.
That rule requires homebuyers to prove that they can afford mortgage payments of at least 5.25% or two percentage points above their agreed contract rate, whichever is higher.
It’s been credited with helping homeowners absorb the shock of rapidly rising interest rates after the COVID-19 pandemic, but some observers say the current arrangement has outlived its usefulness and can lock out otherwise qualified young buyers.
“Had we changed the stress test rules or gone back to doing a five-year fixed at contract rate or contract plus 1%, they would get into the marketplace,” McFadyen said.
He estimated that roughly a third of buyers currently frozen out of the market could qualify under a less strict test, pointing to the fact that many are in their mid-to-late twenties with rising income trajectories still ahead of them.
“The vast majority of them are at the beginning of their careers – say 25 to 27 years old – with enough money for a 5% downpayment, and their income is likely to increase dramatically over the next three to five years,” he said.
The buffer built into insured-mortgage qualification is another hurdle, McFadyen said. He pointed to the gap between the maximum debt-service ratios and what buyers can typically carry.
Insured mortgages are capped at a 39% gross debt-service ratio and a 44% total debt-service ratio, and McFadyen argued there’s room in that spread. “There’s a 5% gap there for a reason. We have the ability to service some type of debt payment,” he said.
As for downpayment assistance? McFadyen pointed to BC’s 2016-17 matched downpayment program, under which the government topped up buyers’ savings once they reached a minimum threshold.
BC downpayment program ‘substantially better’ than other measures
The BC government cancelled that loan program, titled HOME, in 2018 after saying that the scheme failed to meet expectations and had seen much lower uptake than first anticipated.
But McFadyen said the measure at least helped homebuyers with the main challenges they were facing in the market and suggested that the government could do worse than reintroduce the plan.
“Love it or hate it, I think that program was substantially better than anything they’ve rolled out since,” he said. Among clients placed in that program at the time, satisfaction was high. “I don’t have a single client who regretted the 2016-17 program,” he said.
“Not a single one. None came back to me and said, ‘We regret doing that.’ All of them are grateful for getting in.”
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