Mortgage stress test pushing more Toronto home buyers into Hamilton market

Canada's mortgage stress test is cutting down on the buying power of house hunters in Hamilton, pushing them into smaller homes and in some cases, out of the area altogether, according to industry experts.

Some first-time house buyers from Hamilton are moving east because of high prices

First-time home buyers in Canada are facing increased competition and smaller budgets, according to a recent report from Royal LePage. (Jonathan Hayward/Canadian Press)

Canada's mortgage stress test is reinforcing the migration of home buyers from Toronto to Hamilton in search of deals.

And that is adding to the already competitive market created by the stress test, which is cutting the buying power of house hunters in Hamilton. 

Industry experts say the stress test is pushing buyers into smaller homes and in some cases, out of the area altogether.

The stress test — forcing buyers to qualify for a mortgage at a higher interest rate than currently exists — is meant to put the breaks on runaway prices. 

It's not going to be the same house. It's going to be less expensive, or will need more work to fix up.- George O'Neill, RAHB CEO

They say prices have dropped, but not by as much as the drop in buying power created by the stress test, putting more pressure on lower end homes- particularly those being sought by first-time buyers.

Realtors Association of Hamilton-Burlington CEO George O'Neill said the average price for all property types dropped 8.9 per cent last month, compared to the same period last year — from $609,664 to $555,661.

Meanwhile, he said, the buying power of people looking to purchase a home has plummeted an estimated 15 per cent since the new mortgage rules were put in place on Jan. 1.

"It's fair to say people are qualifying for less," he said. "It's not going to be the same house. It's going to be less expensive, or will need more work to fix up."

Stress test 're-shifting' expectations

The stress test was introduced by the Office of the Superintendent of Financial Institution as a tool try to cool the country's hot housing market. Now, in order to get a loan from a federally regulated lender, home buyers have to prove they would be able to pay their loan if interest rates became higher than they are today.

That means a buyer who in the past would have qualified for a 3.09 per cent loan now has to qualify at a rate of 5.14 per cent, according to a recent report from real estate company Royal Lepage. So, the same buyer who qualified for a $486,674 home at the old percentage has been bumped down to a residence worth $406,479.

O'Neill referred to the changes in the market as "re-shifting buyer expectations."

He explained the April 2017 was a peak for sales and that the stress test isn't the only factor —fixed mortgages rates have also gone up — but added the test's effect is also being felt at the top end of the city's market, where nine per cent of sales have been in the $1-million-plus range, compared to 12 per cent last year.

Buyers have to 'drive until you qualify'

The Canadian Real Estate Association (CREA), is also pointing to the new mortgage rules as a major factor behind a 13.9 per cent drop in sales compared to previous year's level — the lowest April showing since 2011.

"The stress-test that came into effect this year for homebuyers with more than a twenty percent down payment continued to cast its shadow over sales activity in April," said CREA President Barb Sukkau in a media release. 

Shaun Cathcart, a senior economist with the association, said the average home price in the Golden Horseshoe as a "funhouse mirror" compared to last spring.

"Some buyers are now having to shop further down-market, while activity for higher-end homes has slowed."

You're still getting more square footage for value versus Toronto.- Joe Ferrante, Royal LePage

At the lower end of the housing market the impact of the test is being felt in a different way, explained the economist.

Cathcart said the stress test is continuing to push Toronto home buyers to "drive until they qualify" in places like Hamilton.

Sellers in the city now have more qualified buyers to compete for their properties, but some potential buyers are being out-competed or "priced out of the ownership of housing."

Hamilton house hunters looking east​

Royal LePage real estate agent Joe Ferrante said despite the current challenges, he believes the stress test is actually "good news" for some parts of the city including central and east Hamilton because it will drive even more first-time buyers out of Toronto and Canada's other big cities here.

Royal LePage real estate agent Joe Ferrante says increased competition for housing is good news for Hamilton. (Royal LePage)

"You're still getting a lot of value," he explained. "You're still getting more square footage for value versus Toronto or other metropolitan areas."

As for hopeful homeowners who feel prices in Hamilton are rising too quickly, Ferrante said they tend to head east.

"They're more towards Niagara Falls and St. Catharines, Welland, those types of communities," he said. "If you have half-million dollar town house in Stoney Creek, that gets you a nice little single with a heck of a lot of property further into the Niagara region."