The shock on the other end is palpable—I can almost see the expression on people’s faces through the phone lines!
What? I make $80,000 a year and can’t qualify for a single-family home?
Nope! An $80,000 income qualifies you for about a $360,000 property. Single-family homes in the Fraser Valley start at about $550,000!
That’s the reality in which we live in this part of the world. Up-country is following quickly behind us.
The fact is, just a few years ago, we could qualify you for a lot more than our current standard of 4.5 times your gross annual income. $80,000 might have qualified you for $450,000. And, back then, homes started at around $300,000. (That was just four years ago!)
But the last time interest rates were low and the housing market hot, our nanny overseers (the Federal government, through their controlled agencies like CMHC) decided we needed to be protected from ourselves.
What if people buy at their affordability limit with a low rate and then the rate goes up (which it surely would)? They wouldn’t afford the increased payments, and we’d have a ton of foreclosures to deal with. The logic was sound, the patronizing spirit notwithstanding.
So, at the start of 2018, they introduced the “stress test,” a creative way to keep people from overextending themselves by making it much tougher to qualify. With fewer people qualifying, it would also cool down the overheated market, they reasoned.
The stress test simply required you to qualify for a mortgage at least two percentage points higher than the one you would actually be getting, or 4.79% (whichever is higher). If you qualified at 4.79%, you’d be protected until rates rose at least to that level, the lower amount that you were actually paying for would be “money in your pocket.”
It had the desired effect. It took about 20% off the maximum mortgage people could qualify for ($450k, for example, dropped to $360k), and cooled down the overheated market considerably.
Despite its corrective effect at the time, the rules have remained in place. Rates did rise in between, but the pandemic dropped them right back down. Yesterday I saw a 1.57% rate advertised, and I’ve heard of even lower. That means you’re having to qualify for a rate triple to what you’re getting.
Now the feds have stepped in again! A 3.22% buffer is not good enough, they say. The market is so hot (Don’t we all know that?), that we need even more drastic measures to cool it down again.
So, June 1, the stress test threshold is moving up from 4.79% to 5.25%. This slices off another 4-5% from the value of property you will qualify for. That $360k just became $344k.
It means that our qualifying ratio now must drop from 4.5 times to 4.3 times your gross annual income.
Will it have the effect of cooling down the market? Perhaps. But the market has already showed signs of slowing. It strikes me as fitting the proverbial “closing the barn door after the horses have already escaped.”
What is certain, though, is that people will have to settle for a more modest property than they’d hoped for. That 4-bedroom home might have to be a 3-bedroom home. That 2-bedroom, 2-bath condo you were hoping for might have to be a 1½ -bath, bedroom + den condo instead.
Or you might be left out of the housing market altogether. A 4-5% decrease is not huge, but it may just be the difference between qualifying and not qualifying.
What the feds hope, is that the $360k property will drop back down to $344k and you will still qualify. Frankly, I doubt that will happen.
Could there be another reason for this increase in the stress test threshold? Might it suggest that the feds are anticipating rapid inflation emerging out of this pandemic, pushing interest rates much higher than would otherwise happen?
In fact, might this be their plan? How else will they pay for the massive debt they have incurred on our behalf during this pandemic?
In any case, we all have to adjust–our expectations and our wallets.
That’s what we’re continually doing at Fraser Valley Rent 2 Own as we seek to find creative solutions to marginal mortgage qualification files.