{"id":11406,"date":"2019-01-16T11:11:24","date_gmt":"2019-01-16T19:11:24","guid":{"rendered":"http:\/\/www.roryc.ca\/blog\/?p=11406"},"modified":"2019-01-09T11:12:42","modified_gmt":"2019-01-09T19:12:42","slug":"stress-tests-are-better-than-losing-the-home","status":"publish","type":"post","link":"https:\/\/www.roryc.ca\/blog\/2019\/01\/stress-tests-are-better-than-losing-the-home\/","title":{"rendered":"Stress Tests Are Better Than Losing the Home"},"content":{"rendered":"

‘Twas the night before Christmas, when all through the house \u2013 not a creature was stirring, not even a mouse. Well, except for Evan Siddall\u2026 fine, it was the afternoon and he was on Twitter. On Christmas Eve, the CEO of the Canada Mortgage and Housing Corporation (CMHC) defended mortgage stress testing. The head of the agency warned first-time buyers that a stress test is unfair, but it\u2019s better than risking your home.<\/p>\n

The Who? From Where?<\/strong><\/p>\n

Evan Siddall is everyone\u2019s favorite renter\/former Goldman Sachs exec, that happens to be the CEO of the CMHC. For our new readers, the CMHC is the Crown Corporation that acts as Canada\u2019s national housing agency. They play an important role in providing mortgage liquidity.<\/p>\n

Who he is pretty important for context here. He\u2019s not a short-seller your real estate agent convinced you might have another angle. He\u2019s not someone that\u2019s jealous of your 300 sqft condo with a combination bathroom\/kitchen. This is the person who the government appointed to help you get a mortgage to buy a home, and help banks manage risk.<\/p>\n

Stress Testing Real Estate Buyers<\/strong><\/p>\n

Unfamiliar with stress testing? Stress testing is when lenders make sure a borrower can pay their mortgage at higher rate. The majority of new mortgages in Canada require a stress test. This helps to ensure borrowers can continue to make payments if borrowing rates rise. Borrowers that pass a stress test, also show they have a little wiggle room for emergencies. An unspoken benefit is owners can top up equity in the event the home falls below a critical threshold. Negative equity for instance, would require a top up, and you\u2019ll need extra cash to pay that Realtor.<\/p>\n

Ensuring a borrower can continue to keep their home, even if their expenses rise? Those Canadians are monsters! At least that\u2019s what some politicians and real estate developers have been saying. Afterall, before 2016 there was no test, and the market did, uh\u2026 just fine. Many believe that the rules should be put on hold, until the impact can be studied. It\u2019s unclear if these people understand the irony of what they\u2019re promoting. They want the impact to industry to be studied, before lenders are required to study the quality of their borrowers. Clearly the generosity of our selfless politicians and real estate developers knows no bounds.<\/p>\n

Sucks To Be Stress Tested, But It\u2019s Better Than Losing Your Home<\/p>\n

In just under 400 characters, Siddall gave an important lesson on risk to buyers that might think it\u2019s unfair.<\/p>\n

Important advice, but probably not actually decipherable by a first-time home buyer (FTHB). Let\u2019s do some napkin math, and run the scenarios laid out. Today\u2019s calculations are on a $500,000 home at 5% down (the 95% LTV), with a 5 year fixed mortgage at 3.89% and 25 year amortization. That means the buyer put $25,000 down, and added $19,000 to the mortgage for insurance. At the end of 5 years, the buyer will have paid $64,782 towards principal, and $89,369 towards interest. We\u2019re only going to be using the $154,150 in payments over 5 years. Costs like taxes, maintenance, and insurance will be excluded.<\/p>\n

First scenario is prices go up 10% over those 5 years. In the event that does, you\u2019ve made a $50,000 gain, bringing the value of your condo to $550,000. Combine the gain with the amounts you\u2019ve contributed to principal, and you have $139,782 in equity. The power of leverage, amirite?<\/p>\n

The second scenario is prices go down 10% over those 5 years. In the event this happens, the value of your home drops $50,000, bringing it\u2019s value to $450,000. That\u2019s the 200% loss of the down payment he\u2019s referencing. Combine your down payment, amount contributed to principal, and you have $39,782 left. Life\u2019s hard when you pay $179,150, to be left with less than $40,000. Turns out leverage works both ways.<\/p>\n

Isn\u2019t That Always True?<\/strong><\/p>\n

Yes, this could happen at any point. 5 years ago, you could have put money down in Toronto or Vancouver, and added a nice chunk of equity to your name. Or you could have put it into a home in Calgary and lost 7.73% plus carrying costs. There\u2019s always a risk, but you try to balance that with probability.
\n\"\"<\/a>
\nTowards the end of the real estate cycle, gains tend to taper or turn negative. This is especially true after a large run in real estate prices, after gains may be exhausted. Siddall isn\u2019t making a statement on whether we\u2019re at the peak yet. However, he does appear to be saying you\u2019ll be glad there was a stress test if we are.<\/p>\n

Canada\u2019s National Housing Agency CEO : Stress Tests Are Better Than Losing Your Home<\/a> by Better Dwelling<\/p>\n","protected":false},"excerpt":{"rendered":"

‘Twas the night before Christmas, when all through the house \u2013 not a creature was stirring, not even a mouse. Well, except for Evan Siddall\u2026 fine, it was the afternoon … [read more<\/a>]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[13],"tags":[],"class_list":["post-11406","post","type-post","status-publish","format-standard","hentry","category-real-estate"],"yoast_head":"\nStress Tests Are Better Than Losing the Home • Rory C Real Estate | Oakwyn Realty<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.roryc.ca\/blog\/2019\/01\/stress-tests-are-better-than-losing-the-home\/\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:title\" content=\"Stress Tests Are Better Than Losing the Home • Rory C Real Estate | Oakwyn Realty\" \/>\n<meta name=\"twitter:description\" content=\"‘Twas the night before Christmas, when all through the house \u2013 not a creature was stirring, not even a mouse. 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