A New Report Sheds Light On The Housing Market Over The Last Year

The Bank of Canada has published its 2021 Financial System Review. The review’s purpose is to determine what factors affect financial stability among Canadians. It also identifies challenges within the country’s financial system that it says “will need to be watched closely.”

The review provides in-depth analyses on the experiences of homeowners from the start of the COVID-19 pandemic until now – and some of the report’s messages warn that home owners have been left vulnerable.

Specifically, the review claims that many Canadian homeowners have taken on mortgages that are considerably large in comparison to their income. As a result, the review explains that unprecedented events, like a job loss, could hit these homeowners harder.

The report is paired with information pertaining to changes to homeowner data over the course of the pandemic. For example, total household debt has risen by four percent since last spring. It rose significantly after the housing market heated up last summer.

The percentage of ‘costly loans,’ or those that are 4.5x higher than the household’s income, rose as well.

How a Change in Stress Rates is Addressing Debt Problems 

According to the bank’s report, the housing market is behaving similarly to that of 2016 – notably, a time followed by stress tests were implemented for mortgage applications in Canada. A stress test determines whether you would be able to afford a hypothetical mortgage if your circumstances were to change. Buyers must ‘pass’ the test in order to proceed with their mortgage. 

Now, mortgage stress test rules are changing in Canada. According to the Office of the Superintendent of Financial Institutions, qualifying rates for stress tests will change on June 1. Following these changes, buyers must be able to afford whichever rate is higher: a rate at 2 percent above the contract rate, or 5.25%.

The federal government also announced that it would set the same standard for insured mortgages, hoping that buyers will be stopped from racking up debt.

Accompanying the announcement, Finance Minister Chrystia Freeland said that “the recent and rapid rise in housing prices is squeezing middle-class Canadians across the entire country and raises concerns about the stability of the overall market.” She added that “maintaining the health and stability of Canada’s housing market is essential to protecting middle-class families and to Canada’s broader economic recovery.”