Last Updated on October 24, 2023 by Neil Sharma
Many of the predictions about first-time buyers becoming excluded from the housing market because of the mortgage stress test are coming true.
As Sherwood Mortgage Group’s president told CREW late last year, Guideline B-20, as the stress test is formally known, would catalyze a decline in market activity—which has, indeed, occurred in most of Canada—and millennial-aged homebuyers would bear the brunt.
“It will be isolated to certain individuals, mostly first-time buyers,” said Anthony Contento. “Will there be a price drop? Possibly; I’d anticipate anywhere between five and 10%, but our real estate will continue to surge, interest rates will continue to stay low, and we’ll make up the difference on the majority of other purchasers out there.”
It is that true interest rates are still low relative to historical levels—although they are climbing—and it’s also true that real estate has continued surging, particularly in Quebec. However, as reported by the Montreal Gazette, first-time buyers are quickly losing buying power.
“What we know for sure is that second- and third-time buyers are the most active right now on the market, especially on the island,” the Gazette quoted Greater Montreal Real Estate Board economist Paul Cardinal as saying. “If you’re a first-time buyer, you’re looking at the very east part or west part of Montreal, or a condo instead of a single-family home. Or if you absolutely want a single-family home, you might have to go to the suburbs.”
The city has born witness to 15 consecutive quarters of rising sales—Q1 of this year hit a seven-year high—which has depleted inventory and driven prices up.
Montreal Island’s median house prices going back a decade have jumped 63%, however, it’s greatly outpaced median income, which only saw a modest 9% increase. The predictable result is a young buying cohort unable to save for down payments.
The stress test, which requires borrowers to demonstrate that they could withstand a 2% interest rate hike, isn’t the only impediment for first-time buyers. A slew of regulation over the preceding eight years, including shortening amortizations, has created a perform storm.
To elucidate how quickly housing costs have escalated, in 2008 the average single-family home in Montreal’s Sud-Ouest cost $275,000, requiring a minimum down payment of $13,750. Fast forward 10 years, and that same home, now $600,000, would require at least $36,000 down.
The median price for a single-family home in the city’s trendy Plateau-Mont-Royal is over $1mln.
Two years ago, the Canada Mortgage and Housing Corporation decided that uninsured mortgages over $500,000 required 10% down, and in addition to disallowing mortgage insurance for homes over $1mln, they now require 20% down payments.
Cardinal says that while buyers can still get into Montreal’s market, the likelihood that they can buy detached homes on the island will diminish with time.
“Scarcity dictates prices. The more scarcity you have, the more upward pressure there is on prices,” Cardinal said. “On the island of Montreal, where land is available to build, it will be for condos. Scarcity of single-family homes will increase.”
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Neil Sharma is the Editor-In-Chief of Canadian Real Estate Wealth and Real Estate Professional. As a journalist, he has covered Canada’s housing market for the Toronto Star, Toronto Sun, National Post, and other publications, specializing in everything from market trends to mortgage and investment advice. He can be reached at neil@crewmedia.ca.
