Are conditions improving for buyers in the housing market?

Many Canadians appear to be moving off the sidelines

Are conditions improving for buyers in the housing market?

Mortgage brokers and their clients have witnessed a marked slowdown in purchase activity over the past year as interest rate hikes by the Bank of Canada increased borrowing costs and rampant inflation brought about a cost-of-living crisis for households across the country.

But with those rate hikes seemingly on hold for now, and inflation ticking steadily downwards, could the mortgage market be set to heat up in the months ahead?

Lev Keselman (pictured top), founder and managing partner at the Vancouver-based Peak Mortgage Company, told Canadian Mortgage Professional that a series of factors were helping would-be homebuyers move off the sidelines, not limited to a higher degree of certainty on the future of rates.

“We’ve definitely seen an increase in activity since the Bank of Canada’s rate pause in March,” he said. “Buyers are more assured that rates have peaked and [may] possibly start decreasing soon. Also, a combination of the spring market and a lot of pent-up demand is driving more activity in recent weeks.”

That’s not to say that the picture is rosy for borrowers, with plenty of hurdles remaining including steep affordability challenges for new entrants to the market despite plunging home prices over the last 12 months.

“We do not see significant price drops at the entry-level homes, which are really most brokers’ bread and butter,” Keselman said. “Although prices have come down in certain areas in Metro Vancouver, the fact that rates remain high means that qualification is still hard for first-time homebuyers.”

How is the stress test affecting new buyers?

The current mortgage stress test guidelines see borrowers required to qualify at a rate of either 5.25% or the contract rate plus two percentage points, whichever is higher.

While rates were rock-bottom at the height of the COVID-19 pandemic, the fact that they’ve risen so dramatically during the past 12 months means the latter qualifying criterion almost always applies in the current market – something that can prove hugely problematic for buyers, according to Keselman.

Still, he said an upside for those interested in buying a new home is that they’re no longer facing the intense competition that pervaded the market when activity was at its highest in 2021 and early 2022.

“Having the stress test of best rates plus 2% means that mortgages are qualified at around 7% or more versus 5.25% from last year,” he said. “However, there are some first-time buyers that are benefiting from less activity compared to 2021-22, as there are fewer bidding wars and overall, a more pleasant buying experience.”

Qualification difficulties are some of the biggest challenges facing Vancouver borrowers, Keselman said, as well as monthly payments that have climbed precipitously in recent times.

Prices in the city’s real estate market are among the steepest in Canada, with benchmark prices sitting over $1.1 million despite falling in recent teams, according to MLS’s Home Price Index (HPI).

Should banks take a new approach to qualifying borrowers?

With those qualification headaches in mind, Keselman said banks might consider a fresh approach to help borrowers who may be creditworthy but aren’t able to meet the current high standards.

“It is just as difficult to qualify in the alternative space due to high rates. It would be interesting to see what the effects would be if banks were to offer more flexibility such as a higher inclusion of rental income and other non-traditional sources of income,” he said. 

A recent analysis by RBC Economics suggested that many real estate markets across Canada may have already reached their bottom and are starting to tick upwards, with Vancouver listed among the cities seeing the most pronounced sales and home price appreciation.

For Keselman, the city’s outlook is set to be healthy for the foreseeable future. “With inflation expected to be coming down to the 2% target range by the end of the year, we believe Vancouver’s real estate market [will] remain attractive from both an investment and livability standpoint,” he said.

“The combination of record immigrant and interprovincial migration means that there will always be demand for real estate here.”

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