The Canadian real estate market has experienced a sluggish summer despite recent interest rate cuts. Calls have been made within the industry to reconsider the stress test, a tool used to determine mortgage qualification. Christopher Alexander, president of Re/Max Canada, is among those advocating for the stress test’s elimination. Introduced in 2017 in anticipation of rising interest rates, the stress test requires borrowers to prove their ability to afford payments at a qualifying interest rate, typically higher than the actual rate in a mortgage contract.
The stress test mandates borrowers to qualify for a mortgage at a rate of 5.25 percent or two percent above the contract rate, whichever is higher. This ensures borrowers can handle higher monthly payments if the central bank rate were to rise rapidly. However, some experts caution against removing the stress test, as it could lead to inflated home prices through increased competition and bidding wars.
While Alexander suggests tailoring policies to different housing markets based on their specific needs, others warn against the unintended consequences of scrapping the stress test altogether. Lower borrowing costs have failed to stimulate the Canadian housing market, with data from July indicating a lackluster performance despite interest rate cuts. Experts anticipate a potential resurgence in buyer activity in the fall due to increased affordability in certain markets.
