2018 was a dismal year for housing markets across Canada, especially in the GTA, as a combination of rising interest rates, a new mortgage stress test and economic uncertainty all took a heavy toll. Ongoing NAFTA negotiations, a decline in Oil Prices and GM’s announcement that they intend to close their flagship plant in Oshawa, didn’t help property values in the Greater Toronto Area. Housing markets across Canada will likely pick up steam in the latter half of 2019, as the pace of interest rate increases slows down, evidenced by recent signals from the U.S. FED and the Bank of Canada. Markets will adjust to the new reality of stress tests and NAFTA issues will likely get sorted out with congressional support and a sober realization that Canada is and has been a very strong friend and ally to our American neighbours. The likelihood of a minority government in the federal election this fall could also be advantageous for a balanced political approach. In this blog post, Hatch examines how the housing slowdown of 2018 came into effect, what this means for new mortgage applicants and how 2019 is shaping up for homeowners and those looking to enter the housing market.
What led to the Slowdown of Housing Markets Across Canada in 2018?
To answer this question, we need to first roll back and take an overview of economic conditions in Canada over the past decade. In 2008, Canada, and indeed the rest of the world, experienced a severe economic shock initiated by the housing market meltdown in the U.S. with an abundance of subprime mortgages, falling house prices and homeowners who couldn’t afford their mortgage payments or sell their homes. This led to the full blown financial crisis dubbed, “the Great Recession.” The resource-dependent Canadian economy was hit by another shock in 2014 as oil prices plummeted by more than 50%, in the span of a few months, due to over-supply and weak economic growth. These two factors forced the hand of the Bank of Canada, which dropped its key overnight lending rate to an incredibly low 0.5 per cent for seven straight years until its starting hiking rates in July of 2017, followed by four more successive hikes to bring us to today’s rate of 1.75 per cent.
With such low rates for such a long time, and one of the fasted growing economies in the G7, conditions were ripe in many parts of Canada for soaring housing prices, fueled in some hotbeds of the country by foreign investors and speculators looking to make huge gains by flipping properties or parking excess capital in overheated markets like Vancouver and the GTA. Many families, especially first-time homebuyers, were being priced out of the market, drawing the attention of governments, regulators and the central bank:
After national house prices began to skyrocket in 2015—climbing 15 per cent annually and by as much as 30 to 40 per cent in some red-hot markets—regulators and governments scrambled to cool things down. – Maclean’s
The combined interventions of these authorities, which included a foreign buyers tax in B.C. and Ontario, higher mortgage insurance premiums from CMHC, the initiation of stress tests by the OSFI; which are meant to ensure that both insured and uninsured mortgage applicants can afford their payments if rates go up significantly. We also experienced a stream of rate hikes by both the Bank of Canada and the U.S. Fed, which impacts fixed rate mortgages in Canada.
Several of these changes, such as the stress test for uninsured applicants, were telegraphed in advance, causing many homebuyers to finalize their purchases before the new rules came into effect at the beginning of 2018:
To avoid qualifying for a mortgage under stringent regulations, many buyers advanced their housing purchases to 2017. Seasonally adjusted data from the Canadian Real Estate Association shows that more than 46,000 homes transacted across Canada in December 2017. With stress tests in place, housing transactions in January 2018 declined by 14 per cent from the month before… Regional housing markets were also affected by changes in mortgage regulations. Housing sales in greater Toronto have been slower in 2018 than the sales in 2017 or 2016. – Financial Post
This trend continued throughout 2018 as housing sales across Canada dropped to their lowest level in five years and prices were down about 4 per cent from 2017:
“National home sales are projected to post a double-digit decline in 2018, falling to the lowest level in five years despite supportive population and job growth,” said [CREA’s] latest release [December 17, 2018]. Nationally, sales are expected to be down 11 per cent and the average price of a house down about four per cent from last year. – CBC
Impact of 2018 Housing Decline on Consumers and Mortgage Applicants
Driven by two decades of record-low interest rates in Canada, many consumers waded full on into acquiring mortgages, cars, high credit card balances and other consumer debt to the point where we now owe an incredible $2.16 trillion in debt. This is an 80 per cent increase from where we were in 2008, exceeding the entire GDP of Canada! Now that interest rates are finally rising, and the Bank of Canada continues to have an appetite to go beyond the current 1.75 per cent as a hedge against inflation, many Canadians are facing the dire prospect of renewing their mortgage at rates higher than when they first applied.
At the same time, federally regulated lenders now must put both insured and uninsured mortgage applicants through a stress test to ensure they can afford their mortgage payments at either the 5-year posted average by the Bank of Canada or an increase of two full percentage points over the deal they were able to negotiate with their current lender, whichever is higher. The new stress test has reduced the amount that Canadians can afford to carry on a mortgage by about 20 per cent, and is one of the key factors sending home prices plummeting across the country.
With homes not selling in 2018, like they were in 2017 and 2016, and prices dropping, equity is shrinking, interest rates are rising and credit of all types is tightening up leaving many Canadians in a difficult financial situation, reflected in the growing number bankruptcy filings:
There were 11,641 consumer insolvencies in October of this year, up 9.2 per cent from a year earlier, according to data from the Office of the Superintendent of Bankruptcy… It’s the largest number of consumer insolvencies for the month since at least 2010. “High consumer debt levels and rising interest rates have been a growing concern over the last few years and we are now starting to see this reflected in the number of insolvent Canadians filing bankruptcies or proposals,” said Chantal Gingras, chair of the Canadian Association of Insolvency and Restructuring Professionals (CAIRP). – Huffington Post
The negative effects of the cumulative rate increases, which started in mid-2017, were also reflected in the fall of 2018 in the vital economic areas of auto sales and growth in residential mortgages:
Light vehicle sales dropped 9.4 percent in November from a year earlier, the most since 2009, according to a report [December 3rd, 2018] by DesRosiers Automotive Consultants Inc. Outside the financial crisis, the decline was the biggest since 2004. Meanwhile, Bank of Canada data show growth in residential mortgages decelerated to 1.38 percent in September on an annualized three-month basis, the weakest pace since 1982. – BloomBerg
Expectations for Canadian Mortgage Rates and Housing Markets in 2019
We Canadians are a hardy lot and we will weather this storm just as we have with the many snow and ice storms that have come our way in 2019. The Economic data coming in over the past few months has given the Bank of Canada some pause in its pursuit to increase interest rates toward its stated neutral range of 2-3 per cent. In its January policy announcement, the central bank left its overnight rate unchanged at 1.75 per cent and lowered its forecast for the Canadian economy in 2019:
The bank also downgraded its expectations for Canada’s economy this year. A 25 per cent plunge in the price of oil since October has had a “material impact” on the economy, to the point where the bank is now forecasting just 1.7 per cent growth this year. Three months ago, it was expecting 2.1 per cent growth. But despite that slowdown, the bank still indicated it plans to raise the rate again sooner rather than later. “The policy interest rate will need to rise over time into a neutral range to achieve the inflation target,” the bank said. – CBC
The central bank’s next rate announcement is March 6th, 2019, but there doesn’t appear to be a strong appetite for a rate increase until later in the year. With the oil sector still in shambles, and a deal on the TransCanada Pipeline so we can get our oil to market, not to mention all the construction jobs that will go with this massive project, nowhere near complete, many economists predict that the Bank of Canada won’t start hiking rates again until oil prices have stabilized at a higher level. U.S. trade relations with China have also increased economic uncertainty and risk, as has the stall in NAFTA 2.0 negotiations.
As housing markets across the country adjust to all the new regulations that have been initiated in the past couple of years and, hopefully, the central bank curbs its appetite for more immediate rate increases, real estate experts are predicting that by latter half of 2019, house prices will start to rebound at a modest clip:
In a report issued [December 2018], realtor Re/Max predicted house prices would rise by a tepid 1.7 per cent in 2019, while in a separate report, realtor Royal LePage predicted prices would rise 1.2 per cent next year nationwide. – Huffington Post
Hatch Has you Covered
As part of our ongoing commitment to making mortgages affordable for ordinary Canadians looking for a new mortgage or to renew or refinance their existing mortgages, Hatch is paying close attention to how these economic factors will pan out. Through our established network of lenders, and low overhead due to our online business model, Hatch is fully committed to continually offering some of the lowest mortgage rates anywhere in Canada, regardless of how the economy swings. Simply fill out our online application, and we’ll get cracking right away on a mortgage that’s right for your individual needs.