Stress Testing Vancouver Real Estate Under OSFI’s New B-20 Guidelines

Vancouver real estate buyers could be in for a rough ride. The Office of the Superintendent of Financial Institutions (OSFI) has published draft guidelines around the regulations of mortgage lending. The mortgage industry is up in arms about it, and we wanted to run some numbers to see why. If passed in its current form, Vancouver would see the already low number of households that could buy, drop even further.

Editor’s note: This was written before the announcement the guidelines were passed. These rules are now official.  

OSFI Stress Testing Conventional Mortgages

The new OSFI B-20 Guidelines would make quite a few changes, but today we’re just going to look at rate stress testing. The proposal includes a guideline that would see conventional mortgages tested at 200 bps above contract rate. I know, banking jargon! Let’s break it down.

A conventional mortgage is one with a down payment higher than 20%. 200 bps is what people with a lot of letters after their name call 2%. Basically, any mortgage with a down payment higher than 20%, would require the borrower to prove they can pay the mortgage at a rate 2% higher. This would put conventional borrowers on the same page as insured borrowers. The reason the mortgage industry is not in love with this, is the likelihood of home prices dropping 20%+ is slimmer than the 5% required for an insured mortgage.

Borrowing In Vancouver Today

Under today’s lending conditions, not a whole lot of people can afford a conventional mortgage in Vancouver on a typical home. A typical home in Vancouver is now a whopping $1,037,300 according to the REBGV. Note, that’s typical composite, not even a detached unit. The lowest mortgage rate we could find without digging too hard is 2.89%. After a 20% down payment, only 24.21% of Vancouver households can carry the payments for a typical home, under existing rules. This assumes very good credit, but not perfect. To put that number in context, REBGV reported 4.1% of homes traded hands just last year.

 

The above video visualizes the changes for conventional mortgage borrowing against median household income by Vancouver Census tracts. The blue are Census tracts with a median income high enough to buy a typical home in Vancouver, and the coral are tracts that can’t. The timelapse shows how this trend would change if stress tested at 200bps.

Stress Testing Vancouver Households

Under the proposed guidelines, borrowing power drops by just over 25%. Vancouver is one of the few cities in the country to be significantly impacted by these rules. Stress testing drops the number of Census households that could carry a traditional mortgage on a typical home down to 16.68%. That’s the lowest number I’ve seen in the country.

To contrast, 49% of Census households in Toronto can carry the payments for a typical home in the city. If the guidelines passed, Toronto would see 40% of households able to do so. Vancouver already started with only a few households able to buy, and that number is going to plummet.

Now, don’t get me wrong – there’s two sides to these numbers. Ensuring that people can continue to pay their mortgage at a higher rate is the responsible thing to do. However, there will be an impact on the number of people that could borrow. This either drops transaction volume significantly, as less people can qualify to borrow enough. Or this drops home prices, to continue the transaction volume.

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