If you look at a graph, home price escalation is trending up at an incredible rate. Combine that spike with historically low rates and skyrocketing debt levels across the country, it’s clear something had to be done to attempt to restore balance in the market and protect Canadians.
But Sarb Uppal, business development manager at Community Trust, isn’t sure the imminent stress test hike was the way to go.
“We needed something because it’s unfair for people trying to get into the market to be house-rich, cash-poor and that’s what will end up happening,” he said, noting the Office of the Superintendent of Financial Institutions (OSFI) was looking at a myriad of options to check the market even prior to COVID-19.
“This might be the first approach, but it’s (for sure) not the last approach. They might defer to another tool in the future.”
The announcement from OSFI that, starting June 01, it will raise the current stress test level to 5.25%, or the contract rate + 2%, whichever is higher, led to a flurry of last-minute activity at Community Trust, on top of the already seasonally hot Spring market. The tremendous volume as Community Trust assists homeowners and broker partners with getting people into properties prior to the beginning of June has led to growth and overall been fantastic for the company, and Uppal doesn’t see it slowing down.
If anything, the rules will cause a trickle-down effect of people with multiple sources of income that might not be considered at the traditional Big Five banks — “and that’s going to make our space all the more important moving forward.”
“There’s this need for Community Trust and other alternative lenders to be able to look at non-traditional forms of income with the flexibility we provide,” Uppal said. “The self-employed segment has grown in Canada and that requires adaptation.”
Completely new industries are being formed all the time, and one of the conversations Community Trust is having revolves around the generational effect. You’ve got younger buyers looking to come in with income streams from newly formed industries like social media, for example, and that’s “something we haven’t seen before that requires a flexible but prudent approach to their income,” Uppal noted.
At this point, and into the near future, Community Trust is focusing on helping its broker partners through this period and the impact it has on their businesses. Many are dealing with high volumes, and Uppal is always looking for ways to support them. Secondly, the hike in the stress test means the bar has been raised throughout the industry, and Community Trust will be watching for that trickle-down effect from banks and how they’re underwriting.
Going forward, the new rules change the potential pool of buyers and Community Trust will be keeping an eye on the general direction of interest rates and the ever-increasing affordability gap. The distance between owning and not owning, and how we look at income and wealth generally, is changing, Uppal noted. Over and above getting into the market, it’s becoming increasingly important to consider the different market segments. Condo prices didn’t go up as much as townhouses, which didn’t go up nearly as much as a single-family dwelling, for example.
“We’ll have to relook at what we buy in the future because even that spread is totally different in terms of gains or appreciation,” Uppal said. “These new rules have implications on numerous different factors — these are just a few of the ones we’re concentrating on.”
While stress test hikes in an effort to correct the market are nothing new, Uppal said it remains to be seen if it will have the same effect it did in the past, such as in 2018 when it did cool the market.
“It will have an impact for sure on limiting purchasing power, but let’s see how much of an impact it actually has - and what else might be coming down the line,” he said.