Why the mortgage stress test is bad news for renters

The B-20 mortgage stress test modification slated to take effect June 1 will adversely affect first-time homebuyers and push them into a rental market that’s already on the precipice, claim a couple of Toronto real estate professionals.

The stress test, implemented by the Office of the Superintendent of Financial Institutions, will raise the floor rate to 5.25% from 4.79% where it is now. Moreover, the stress test could prevent some first-time homebuyers from attaining ownership and keep them in Toronto’s rental market, where demand will return with a vengeance when the country fully reopens to immigrants, international students, permit workers, and when domestic students return to school in the fall.

“The idea of living in a condo wasn’t, from my memory, as fancy a few years ago as it is today, and it’s going to be what we see for rentals going forward,” Bradley Watson, a real estate broker with Sutton Group-Sutton Realty, told CREW. “There’s nothing wrong with renting, but unfortunately the stress test will push people down the property ladder.”

Indeed, there is nothing wrong with renting, but rental prices will invariably skyrocket once full demand returns to the market, and with mass vaccinations underway and other jurisdictions outside of Canada readying to fully reopen this summer, if they haven’t already, it’s only a matter of time before life returns to normal in Toronto. Although many of the city’s renters took advantage of the lull in rental demand during the COVID-19 pandemic, that window appears to be closing.

“If you’re a renter, lock in your rate now because as demand pressure moves from the resale market to the rental market, as is already happening, and with the influx of immigration—immigrants typically rent for the first three years of moving here—and other segments coming in, there will be additional competition,” said Watson.

The stress test is believed to reduce purchasing power by 4-4.5%, and while not as severe as B-20’s previous incarnation, which cut buying power by 22%, first-time homebuyers, already struggling with runaway housing prices, are likely to be more short-shrifted than any other buying cohort—although it will trickle up to move-up buyers who will have fewer people to sell their homes to.

Alex Balikoti, SVP of sales with Balikoti Real Estate Group, believes the June 1 stress test amendment won’t be as aggravating as it was the last time it changed, however, it will worsen an imminently untenable situation in Toronto’s rental market.

“We’re going to get back to the pre-pandemic rental situation, probably by the end of the year given the amount of units on the market right now, which are dropping, and I think prices will keep increasing because the city’s failing to address the fundamental problem, and that’s a lack of housing units,” he said.

The stress test could also hamper investors who provide precious rental units in a city that has long neglected purpose-built rental apartment buildings.

“The stress test won’t just push more people into the rental market, it will drive out some potential investors who were going to buy units and rent them out as secondary units, but now some of them won’t be able to do that,” said Balikoti. “You’ll have more renters vying for fewer rental units.”