Sales Will Slow as Impact Still Felt from Stress Test
This has been a tougher year for the Canadian housing market, as the federal mortgage stress test, along with rising interest rates, has taken a bite out of buyers’ purchasing power and dissuaded would-be sellers from listing. And, thus far, there isn’t any substantial improvement on the horizon.
Several real estate associations and data think tanks have called for a fairly flat 2019 market, as the stress test continues to be felt at all levels. Slower activity for this year and next even prompted the Canadian Real Estate Association to update its forecast again last month, despite having done so in September. Not only has the association called for an 11.2% decline in sales over the total course of 2018 at 458,200 units, but they’ll fall another 0.5% next year – a nine-year low.
“In 2019, home sales activity and prices are expected to be held in check by recent policy changes from different levels of government, in addition to additional interest rate increases,” CREA states in its November release, adding that’s led to supply-demand imbalances in some markets.
Prices, while typically slower to fall, will soften slightly, with the national average home value to ring in 4.2% lower in 2018 at $488,600, before enjoying a minute 1.7% rebound to $496,800 next year.
While this will be mostly felt in the Ontario, Newfoundland, and Calgary real estate markets, 2019 will be especially tough for BC and Vancouver real estate, which has absorbed a number of provincial policies targeting vacation, speculative, and foreign buyers in addition to the federal stress test. Not only did a forecasted rebound fail to materialize in 2018, but the province will actually experience a “housing recession” over the next three years, according to a report from 1 Credit Union. The province is coming off of a year of steep declines, according to the British Columbia Real Estate Association, with end-of -year-to-date sales down 23.6%, and dollar volumes plunging 23% to $52.4 billion.
Some Rate Relief… For Now
Interest rates have been on an upward tear over 2018 as inflation growth surpassed expectations and the newly-minted USMCA assured trade relations and investment would remain stable with Canada’s largest trading partner. The Bank of Canada (BoC) – the national body that controls monetary policy in Canada via the pricing of its Overnight Lending Rate – indicated they intend to increase rates until they’re neutral, meaning they neither stimulate nor restrain inflation. This would mean hiking from the current 1.75% to between 2.5 – 3.5%. This would require at least five more increases to achieve, making mortgages materially more expensive and further squeezing those negatively impacted by the qualifying stress test.
However, more recent economic events have thrown a wrench in the BoC’s schedule: a recent flare-up in trade tensions between the U.S. and China, as well as plunging prices in the Alberta oil patch, have forced the BoC to take a more protective stance. It opted to leave its rate untouched in its last announcement of the year, after hiking in October, and dropped all forward-looking and hawkish language alluding to where they’d go next.
The BoC’s reluctance was further confirmed by comments made in media interviews by Governor Stephen Poloz who told CTV that while the economy remains in a good place, volatility on a global scale continues to be a risk, especially those of increased tariffs impacting trade and international investment.
The silver lining is that those with variable-rate loans, such as variable mortgages and lines of credit, will get a reprieve from rising monthly payments until the BoC resumes its hiking mandate, while the benchmark used to stress test borrowers will remain the same for the time being.
There Will Be Fewer Mortgages Issued
The aforementioned stress test, which requires all borrowers of new mortgages to qualify at a rate roughly 2% higher than the one they’ll actually get from their bank, has arguably had a profound impact on the housing market; not only has it shrunk the amount of mortgage an average borrower qualifies for, but has knocked thousands of prospective purchasers out of the market altogether, resulting in slower sales across the nation.
However, home buyers aren’t the only ones to feel its brunt: lenders have seen the number of issued mortgages fall over the last year as a result of slower activity. A Q2 report from the Canada Mortgage and Housing Corporation revealed the number of new mortgages taken out in 2018 fell to 205,000, a year-over-year decline of 11.9%.
The British Columbia Real Estate Association also weighed in on this phenomenon in its end-of-year mortgage rate assessment stating, “The impact of the mortgage stress test is weighing heavily on traditional lenders’ ability to grow their mortgage books, with growth in residential mortgages at its slowest pace in 17 years.”
It’s also anticipated that many mortgage holders will face higher rates upon renewal, thanks to another feature of the stress test; borrowers who remain with their existing lender generally won’t be re-tested, but those who make the jump to another bank will be. That’ll dissuade competition in the mortgage market, and give lenders less incentive to offer lower renewal rates to those they know can’t make the switch.
Rising rates throughout the new year will only exacerbate this situation further, as fewer qualified borrowers will continue to put strain on lender mortgage profits.
Rents to Keep Rising
Rental costs have been one of the hottest topics of 2018, especially in Canada’s most competitive urban markets. While the rate of price growth of Toronto homes for sale has moderated considerably, the same cannot be said for the average rent costs; the average one-bedroom unit in the city now fetches $2,163 – a 9.5% year-over-year increase – according to the Q3 Rental Report from the Toronto Real Estate Board.
Skyrocketing rents aren’t just a Toronto issue, however – the Q3 Rental Report from CMHC reveals two-bedroom rents rose an average of 3.5% across the nation in 2018, with the largest increases in BC (Vancouver +5.5%) and Ontario (Toronto +5.2%). Rental vacancies also shrunk in most major markets; Toronto and Vancouver both have roughly 1% of rental stock available, while the Quebec market saw its rate plunge from 3.4% to 2.3% in the span of a year.
And, according to another report, tenants across the nation will be squeezed by an average 6% increase next year; 11% in Toronto, 9% in Ottawa, and 7% in Vancouver, according to the National Rent Report released by Bullpen Research and Consulting, partnered with Rentals.ca.
It’s not a tall order, considering mortgage rates are slated to rise and compromise affordability further next year, putting even greater pressure on the rental market and demand for units.
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