Canada’s Cooling Housing Market: A Soft Landing?

In March, the MLS Home Price Index (HPI) in Canada was up 18.6% YoY, precisely double the YoY rate of 9.3% in 2016. Prices in Toronto alone were up 28.6% from a year ago – a sign of a “bubble” in Canada’s housing market according to some. In April, the Ontario government introduced new regulatory measures, as the HPI ticked up to 19.8% YoY. In May however, the market began to show signs of cooling. YoY HPI ticked down to 17.9% – the first downward movement since November. RBC added:

“The earlier euphoria is gone and more guarded attitudes have set in. This is consistent with our view that housing market activity will be weaker this year compared to 2016.”

While RBC is calling for a soft landing, the IMF warned that Canada’s housing market could pose “significant” risk to its economy. Meanwhile Moody’s had downgraded credit ratings of Canada’s six largest banks. Is the market crashing or landing?

Canada’s Housing Market – Regulatory Effects

It seems the regulatory measures taken by both the Ontario and British Columbia government have curbed the rapid growth. A report from RBC last week mentioned:

“The experience in Vancouver following the introduction of a foreign-buyer tax last August shows that prices faced downward pressure for a period several months before mild upward pressure resumed once the market fully adjusted to the new measures. We expect a similar pattern for Toronto in the near term.”

The regulatory measures taken by the Ontario government, referred to as the “Fair Housing Act” aims to cool demand while raising supply. Mortgage brokers in Toronto claim the sharp price increases in February and March were due to a lack of inventory, a problem it seems the province has properly addressed. New listings in June ballooned 60% YoY as Toronto had its quietest month of June since 2002 with sales falling by 37% from a year ago. In RBC’s mid-year update, they still project a soft landing for the market:

“Our view is that the introduction of Ontario’s Fair Housing Plan will be a turning point for the provincial market. We expect the sharp drop in home resales that occurred since the Plan’s announcement in April to be largely sustained, even though we believe that the effect of the Plan itself will be temporary (perhaps up to six or nine months). Rising interest rates and stretched affordability will become increasingly restraining forces once the market has adjusted to the policy changes. We project moderate—but healthy—declines in Ontario home resales in both 2017 and 2018.”

Canada's Housing Market

Interest Rate Risk

The Bank of Canada raised its benchmark rate on Wednesday for the first time in seven years. While many are concerned about the effect this will have on homeowners in Canada, it is important to touch on the mortgage qualifying rate in Canada.

In 2010, the Canadian Mortgage and Housing Corporations (CMHC) announced implementation of a mortgage qualifying rate for high-ratio borrowers. This rule ensures homebuyers who borrowed using a variable rate, can afford future increases to the prime rate, and borrowers with a short-term fixed rate can afford higher rates at renewal. For example, with a five-year variable rate of 2.25%, the homebuyer must demonstrate affordability of rate around 5.44% (mortgage qualifying rate).

Following the Bank of Canada’s rate hike, some have suggested that even a full percentage point increase wouldn’t likely result in major stress on borrowers. Dan Eisner, CEO of True North Mortgage, said the average variable mortgage payment across the country will increase by about $25 per month with the quarter-point hike. Which means the property market is unlikely to cool barring a major catalyst.