As we move into the hot, lazy days of summer, many economists are predicting that a recovery in the Canadian housing market is on the horizon for the second half of 2018, beginning in Q3. Housing markets across the country are showing signs of stabilization, after their decimation in the first half of year that resulted from the ‘stress test’ initiated by the OSFI and compounded by rising mortgage rates and a foreign buyers tax in B.C. and Ontario. Although sales volumes and prices were down considerably from the spring of last year, markets are beginning to stabilize, month-over-month, in key areas of the country, such as Vancouver and the GTA… where there are even whispers of price wars starting to be heard.
Wild Ride for Canadian Housing Markets Over Past Year
The Canadian housing market has experienced some extreme peaks and valleys over the last calendar year. For the last several years, markets across the country have been steadily heating up, to a fever pitch in the hottest locations, fueling fears of a market crash, or at least a serious correction. These conditions prompted governments and federal agencies, along with our central bank, to successively apply the brakes to various elements affecting specific housing markets across the country. However, these cumulative efforts have created a huge swing in market momentum that is only now starting to rebound from the torrential slide we encountered during the first half of 2018.
Foreign Buyers Tax Slows Key Markets
In the summer of 2016, “an average single-detached home in Metro Vancouver [sold] for $1.56 million.” (Financial Post) Data collected by the B.C. Ministry of Finance indicated that foreign nationals invested more than $1 billion in residential property, mostly in the Lower Mainland. Many of these homes were sitting empty for large portions of the year, prompting the B.C. government to levy a 15 per cent foreign buyers tax in July 2016. By January 2017, evidence was presented by BMO economist Doug Porter that the new tax was indeed resulting in a price drop of about 8.5 per cent in Vancouver, while by contrast, Toronto’s housing market continued to soar:
“We have enough history now to distinguish the clear divergence between Vancouver (down) and Toronto (still straight up),” Porter wrote. – Global News
Sure enough, in the spring of 2017, housing prices in the Toronto area increased by 30 per cent with some areas in the GTA, such as Barrie, experiencing year-over-year price increases as high as 39 per cent. The Ontario government followed British Columbia’s lead and created its own 15 per cent foreign buyers tax, as the first of a series of three successive measures aimed squarely at curtailing the Toronto housing market, albeit not as drastic as the B.C. tax, since foreign speculation was not considered as significant a factor driving soaring prices in the GTA.
Interest Rates are Rising After a Long Slumber
The second and more significant measure came by way of an interest rate increase by the Bank of Canada. In July 2017, our central bank raised its key overnight lending rate for the first time in 7 years. During the first half of 2017, Canada’s economy was roaring, leading the G7; in fact, the Canadian economy grew by an average of rate of 3.6 per cent, between July 2016 and July 2017. This prompted the Bank of Canada to raise it key rate again in September 2017 in an effort combat inflation, especially in the area of household spending, which was driving economic growth in Canada:
For all of 2017, StatCan says household spending easily made the biggest contribution to growth, followed by inventory and business investment. It also says Canada’s exports grew for the second-straight year with gains in both goods and services. – Global News
In the last quarter of 2017, however, slumping exports caused the Canadian economy to slow to 1.7 per cent growth. This plunge was counter-balanced by very strong employment numbers in November, indicating a drop in the jobless rate to 5.9 per cent. Additional inflationary pressure came from compensation rising 1.3 per cent, the highest growth since 2014. The central bank responded with another interest rate hike in January 2018, one of two factors directly triggering the housing market avalanche we witnessed during the critical spring real estate season.
New Stress Test Buckles Housing Market
On January 1st, 2018, the OSFI instituted a new “stress test” for uninsured mortgage applicants, which meant that even those careful savers, who managed to scrape together a 20 per cent down payment and thus avoid the cost of mortgage insurance, would now have to prove that they could make their mortgage payments if their current rate, or the five-year average rate posted by the Bank of Canada, went up by 2 full percentage points, whichever is higher.
The timing on this measure really couldn’t have been much worse. Many industry leaders, such as OREB called this measure “overkill,” happening on the heels of foreign buyers taxes and rising interest rates. The OSFI could have avoided this triple whammy if they had instituted their stress test for all applicants when they had the chance back in October 2016, when they introduced their first stress test for mortgage applicants with less than 20 per cent down. This was also when the housing market was starting to overheat and the Canadian economy was stronger and better able to bear such a shock.
Perfect Storm Puts a Freeze on the Spring Housing Market
The perfect financial storm resulting from the new mortgage restrictions, rising interest rates and economic uncertainty caused by trade tensions with the U.S. saw a huge drop in the Canadian housing market, particularly in the vital economic hub that is the Greater Toronto Area. Sales volumes across the country dropped significantly in January and February, with home sales dropping 16.9 per cent nationally in February and an incredible 35 per cent in the GTA. Prices also dropped nationally by 12 per cent on average across the country compared to February 2017.
Housing Market Starts to Thaw in Late Spring
Just like the weather across many parts of Canada, the general housing market decline continued through March and April to lows not seen since the global recession of 2009, increasing fears that the slide might continue unimpeded, especially in the face of continued economic uncertainty. Finally, in May, signs that the bottom had been reached came by way of evidence that many housing markets across the country were adjusting to the new mortgage conditions and starting to stabilize:
The stabilization suggests homebuyers are beginning to adjust to the impact of tighter mortgage rules and higher interest rates, easing concern about a sharper correction. Sales rose in about half of all markets. They climbed 1.6% in Toronto, the nation’s most populous city, after falling to recession-era lows in April.
“It’s a first sign” of “stability” in the market, Benjamin Reitzes, a Canadian rates and macro strategist at BMO Capital Markets, said… “For policy makers, that’s exactly what they are looking for, that the bottom isn’t falling out for housing. – National Mortgage News
Further evidence of stabilization continued with some growth in the month of June over the same period last year:
The Toronto Real Estate Board (TREB) revealed [July 5th] that home sales in the Greater Toronto Area rose 2.4 per cent to 8,082 in June, up from the 7,893 homes that changed hands the same month a year ago. When compared with May, those number represented a 17.6 per cent spike. – Global News
To put this increase in context, it should be noted that sales volume last June were already declining in the GTA from the record highs earlier in the year.
There has also been a general tightening up of the market with TREB reporting that new listings fell by 18.6 per cent, compared to June 2017, as many potential sellers are waiting for market conditions to further improve before putting their most substantial asset up for sale.
Bank of Canada Rate Decision in July
The odds may now be tipped in favour of another rate increase by the central bank this week. Housing markets are finally seeing some level of stability at the end of the second quarter, and the Canadian Job market continues to grow, adding 32k more jobs in June.
Trade uncertainty with the U.S. and NAFTA continues to be the biggest x-factor, and whether President Trump will follow through on his threats of a new round of tariffs, aimed directly at the Canadian auto industry. However, political tides and focus under the current U.S. administration can change suddenly and sharply. A strong Canadian jobs market, low oil prices and other factors are contributing to a brighter outlook for the Canadian housing market in the latter half of 2018, but these same factors, especially household spending are also likely to put more pressure on the Bank of Canada to raise its key rate… if not this week, then very likely in September, barring an all-out trade war with the U.S.
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