‘Drive until you qualify’: Mortgage stress test forces homebuyers further outside GTA to find house they can afford
More than half of potential home buyers in the Greater Toronto Area (GTA) were affected by the Office of the Superintendent of Financial Institutions (OSFI) mortgage stress test in 2019, according to a survey in the yearly housing market report released by the Toronto Regional Real Estate Board on Thursday.
Many of the affected buyers decided to change the home price, location or type in order to adjust to the stricter standards of the stress test. OSFI implemented the test in 2018 out of concern for surging debt Canadians were carrying, requiring additional funds out of potential buyers in order to qualify for a mortgage.
Others surveyed by Ipsos for the real estate board sought alternate lenders, since only federally regulated lenders are affected by the stress test.
“This stress test arguably precluded many households from listing their home and purchasing another, because they would not have qualified under the new stress test regime for the additional funds required to make their purchase,” TREB said in its report.
But for buyers looking for a different type of home to better suit the stress test requirements, they might be out of luck. Ipsos polling found that while the majority of intending buyers are interested in low-rise housing such as townhouses and semi-detached homes, new listings have been mostly detached homes or condominium apartments.
On top of that, the number of new listings in the GTA in 2019 went down 2.4 per cent from 2018 to 152,739. Coupled with a job creation rate almost double the rate of homes being created annually, increased immigration into the GTA and millennials reaching “peak home buying” age, the demand for housing has far outpaced the supply, pushing the average housing price up.
Jason Mercer, TREB’s chief market analyst, said the imbalance has been building up over the past decade or so.
“You’re seeing a strong regional economy that has continued to attract newcomers to Canada … but at the same time, listings are flat or down,” he said. “That just creates more competition between buyers and we’re seeing an acceleration of price growth.”
The average selling price of a home increased four per cent from 2018, and TREB expects that price to increase 9.8 per cent from 2019 to 2020.
TREB’s longer term forecast to 2031 based on Statistics Canada and Ontario Ministry of Finance findings, suggest that underlying housing demand in the GTA will decrease gradually, reaching just over 15,000 by 2031 from a current average of just under 30,000.
Mercer said the projections have to do with where populations will likely settle over time.
You’re seeing a strong regional economy that has continued to attract newcomers to Canada … but at the same time, listings are flat or down
Jason Mercer, TREB’s chief market analyst
“It depends on where we expect new units to come on the market. People are going to live where there’s a supply of housing and where market conditions are a little bit more balanced,” he said. “I think that’s something that has contributed to people looking outside of the GTA.”
In early 2019, the City of Toronto Economic Development and Culture Division staff analyzed population projections provided by Statistics Canada from 2001 to 2018. They found that more people have been migrating from within the Toronto metropolitan area to elsewhere in Ontario than those who have moved from anywhere else in Ontario to the GTA since 2015. At just under 18,000, the 2018 projection of people moving away from the GTA was almost double the projections from 2016 and 2017.
Intra-provincial migration from Toronto to elsewhere in Ontario was also projected to be the highest among the 30-34 age group.
Mike Moffat, economist and professor at Ivey Business School, said these numbers indicate that young families are leading the move from the city to outside the GTA, and he noted that it’s not a new phenomenon.
“It’s ‘drive until you qualify,’” Moffat said. “You move the distance you need to move to be able to afford a house. This is a long-term trend, but what’s changing is the distance people are moving from Toronto.”
While new families might have previously moved to Richmond Hill or Milton, Statistics Canada estimates show that families would be moving further, outside of the GTA to places such as London, Ont. and Barrie, Ont.
Ann Marie Murnaghan, a geography professor at Ryerson University, said this likely has to do with housing availability along with affordability. “The supply of single-family dwellings is really going up past the 905 region.”
Murnaghan also noted that the kind of housing available in Toronto might be one or two bedroom apartments or social housing, sometimes the only options for recent migrants or refugees moving into the city.
You move the distance you need to move to be able to afford a house. This is a long-term trend, but what’s changing is the distance people are moving from Toronto
Mike Moffat, economist
The Statistics Canada data projected that more than 80 per cent of population growth in Toronto is due to international migrants.
TREB report found that one- and two- bedroom units account for 94 per cent of available rental stock in the GTA, and 80 per cent of that stock is in the city of Toronto. The report predicted the supply-demand imbalance will put upward pressure on housing prices over the next decade.
“I think if we did have a greater diversity and a greater supply of housing coming online in general, it would give people more options,” Mercer said. “Some people today, depending on their finances, need to look elsewhere to purchase a home.”
Murnaghan said that, of the few units in the city that could work for a family, the vacancy rate is so low that it would be unlikely for any to be available any time soon.
Toronto’s vacancy rate reached 1.5 per cent in 2019, one of the lowest rates in the country according to the Canadian Mortgage and Housing Corporation.
For now, younger households ages 25 to 34 will likely opt to rent for longer, with six out of 10 choosing to rent instead of buy according to the TREB report, or move to outside the GTA if they are looking to buy.
A shrinking supply of available homes for sale in Canada’s largest city continued to drive prices higher last month, bringing annual increases to the strongest in more than two years.
Benchmark prices climbed 1 per cent in January and are up 8.7 per cent from a year earlier, TREB said in a separate report Thursday, the biggest annual increase since October 2017. The price gains are being fuelled by a combination of strong demand and shrinking supply, with new listings down 17 per cent in January from a year ago.