10 Factors Putting The Brakes On The Housing Market
by Yvonne von Jena | April 11, 2018
Over the past year and a half, there have been at least ten factors that are putting the break on home sales. Here they are, in no particular order:
As of October 2017, the federal government expanded mortgage rate stress test to all insured mortgages. That is, homebuyers need to qualify for a loan at the negotiated rate as well as the Bank of Canada’s (BoC) 5-year fixed posted mortgage rate (which is higher), making it harder for some homebuyers to qualify.
As of November 2017, new restrictions were applied to limit mortgage insured transactions to the following:
As of January 1, 2018, in its updated Guideline B-20 the Office of the Superintendent of Financial Institutions (OSFI) announced that its federally regulated financial institutions must qualify the borrower at a rate > 5-year benchmark rate published by the BoC or the lender contractual mortgage rate + 2%. Based on analysis by the BoC and others, could cost some homebuyers ~20% of their purchasing power, such that ~ 10% of Canadians who obtained an uninsured mortgage between mid-2016 and mid-2017 would not have qualified under the new standard (100K Canadians would be impacted, and maybe half cannot buy now)
B-20 also tightened other requirements such as: restrictions on certain lending arrangements that are designed or appear designed to circumvent LTV (loan-to-value) ratio limits, and requiring lenders to enhance their LTV measurement and limits so they will be dynamic and responsive to risk (which many lenders were doing anyway).
Taken together, interest rates have risen meaningfully. For example, the BoC’s interest rate increased from 0.5% since before 2016 to 1.25%, that is, in the span of about 7 months (see chart below*)
The following chart provides a good visualization of the changes:
There is more coming. Although analysts disagree on how many more times the Bank of Canada will raise rates this year, most of them believe it will implement at least one more hike before the end of 2018.
Effective March 2017, the mortgage insurance companies increased their homeowner mortgage loan insurance premiums. The changes were to “preserve competition in the mortgage loan insurance industry and contribute to financial stability”. For many homebuyers, the higher monthly premium was not a significant amount.
In April 2017, the Ontario government announced its Fair Housing Plan with 16 proposed measures, and implemented a 15% non-resident ‘speculation tax’ for foreign buyers in the Greater Golden Horseshoe area.
In August 2017, the BC government imposed an extra 15% tax on foreign buyers in metro Vancouver. Less than a year later, in February 2018, the BC government announced a 30-Point Plan for housing affordability in its budget; it will be introducing two new major taxes on real estate:
Governments at various levels have been trying to prevent flipping, discourage foreign investment and close loopholes around real estate investment gains. For example, in October 2017 the federal government announcement that it would be requiring new reporting to the Canada Revenue Agency (CRA) for people selling their homes, which makes it harder for foreign buyers to claim a primary residence tax exemption for which they are not entitled.
In the past few months, we have seen a dramatic reversal in sentiment for Canada’s consumers. The Bloomberg Nanos Canadian Confidence Index, which is a composite gauge based on survey questions, continued to fall in March, dropping to the worst month-end reading in more than a year as households grow increasingly concerned about the durability of the economic expansion. The index ended the month at 56.8, the lowest since January 2017. Consumer sentiment has now declined every month this year, driven lower by worries over growth, with almost 1 in 3 Canadians anticipating the economy will weaken over the next six months.