The Canadian real estate market has been on a positive roll over the last several years. Low-interest rates, a strong economy, increasing immigration, lots of foreign investments along with the attractive capital gain tax exemptions for homeowners has really worked wonders for the housing market. All these factors combined has created a housing bubble that somewhat rivals that of the United States in 2006, especially in the cities of Toronto and Vancouver.
The government has been reluctant to let the bubble bust, since a real estate crash would have severe consequences on the whole economy and letdown multiple types of stakeholders including homeowners that have been licking their chops over their rising profits, even if it is just a number on paper that has the estimated value of their home. Real estate agents have no concern on what happens after they sell a house and could care less about the negative effects on the economy or society as a whole of them getting the most out of their sell. This group is represented by Canadian Real Estate Association (CREA).
Canadian real estate market figures for sales this April showed a 2.9% drop compared to the previous month and sales were down 13.9% lower than in April of 2017. A high percentage of this decrease in sales came from the real estate markets in Toronto and Vancouver, where everyone knew a market correction was imminent.
Canada is a big country though so all regions need to be taken into account to assess the overall housing market. As mentioned earlier, prices might have finally dropped from the astronomical numbers seen Toronto but the housing market is as a strong as ever in other places of the country like Montreal and Ottawa for example.
Interest rates have risen 5 points already this year and are expected to raise again in the summer. The higher interest rates have definitely been a factor to the decrease in home sales during the first quarter but the CREA places most of the blame on the negative impacts of the new mortgage stress tests imposed this year by the Superintendent of Financial Institutions.
Canadian Real Estate New Mortgage Stress Test Rules
The new measures are designed to make sure buyers with uninsured mortgages could handle a significant increase in interest rates without defaulting. This logical move from the Canadian government was put in place to protect the financial system from over borrowing and ensure the people to don’t overindulge on debt.
Last year the ratio of household debt to disposable income for Canada stood at 170% which is just below the record high. This is believed to be from Canadians overextending themselves when it comes to home loans. While the ratio has started to come down some the Bank of Canada is still bothered by the size of that potential debt burden.
Under the new mortgage stress test rules, homeowners will not be able to afford to borrow as much. If they are not able to pass the stress test they will need to either search for a cheaper home or hold off from purchasing. This may sound like a reasonable solution but it is terrible for real estate brokers. The CREA claims that the new stress test is destabilizing markets in other parts of the country where the real estate industry is still booming.
Saving the Housing Market
The truth is that it is not OK for anybody anywhere to purchase a home that they can not afford. Prices either need to come down or people need to be more realistic on how much they can afford. Some of this is already starting to happen in some areas.
The easy credit and low interest rates in the property market is finally starting show its bad side. Adding more taxes to foreign investments and tightening mortgage requirements were long overdue but will be able to save the market. Housing prices are still too high and additional measures will be needed to address the housing affordability. There will be no crash in Canada. The slowing of the market is bad for builders and real estate agents but great for the economy.
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