It’s no secret that B-20 most disadvantages first-time buyers, many of whom have little choice but to purchase condos for which they have five years to close.
“First-time buyers of new construction condominiums will wait five years until their building is delivered, and there should be some leniency there, or even consider a longer amortization for them,” said Barbara Lawlor, president and CEO of Baker Real Estate. “New construction condominiums are a breeding ground for first-time buyers to become homeowners because they’re the most affordable arm of the industry. You can buy an economical one-bedroom condo for less than you could even imagine owning a house.”
Developers need mortgage approval from buyers before they can enter purchase agreements, and Lawlor stated that she’s witnessed cancellations surge during the 10-day cooling off period because purchasers are failing the stress test. It simply doesn’t make sense, she says, because their incomes will rise before they have to close.
“Many first-time buyers are in their first job and, of course, they’ll develop in their careers and earn more money,” she said. “It’s an important part of our industry to help people afford their first home.”
Lawlor added that first-time purchasers of condos have minimal expenses.
“The amenities within the condominium themselves will do away with the need for a health club, and they’re investing in their future. There are so many reasons we have to help first-time buyers get their foot in the door of homeownership. With the stress test, we haven’t had as many first-time buyers because qualifying 2% above posted has shut many of them out.”
Although it isn’t clear how OFSI would proffer first-time buyers leniency, 30-year amortizations could make considerable difference.
“The stress test has effectively pushed first-time buyers out of the market and created a net loss in the market that’s adversely affected it,” said Gregory Colford, principal broker, executive vice president and chief compliance officer of Fundscraper Capital Inc. “Increasing the amortization period to 30 years will reenergize the market and bring them back, and so will abandoning the stress test altogether.
“Let lenders determine risk—it’s their money, let them figure it out. I don’t think the Bank of Canada needs to play in this market anymore. Let market participants determine how we should go forward.”
Since January 2018, when the latest incarnation of B-20 took effect, there have been three rate hikes, and likely more ahead. Colford says B-20 has already cooled real estate markets in Vancouver and Toronto, as it was designed to, and no longer serves a purpose. Moreover, in addition to foreign buyer taxes in both cities, there’s scant reason to expect rapid price acceleration.
“The stress test is artificial, and since it was introduced we’ve had 75 basis point interest rate increases, so first-time buyers are looking at the offered rate plus 300 points,” he said. “For young people and families coming into the market, they have many years ahead and the presumption most underwriters bring to the table is their take-home pay will increase and that means there’s relatively little credit risk with them.”