Josh Sherman Jan 5, 2019

On a recent segment of BNN Bloomberg, Toronto realtor John Pasalis voiced support for extended mortgage stress testing nearly a year to the day after the federal government introduced it.

“The stress tests are great,” Pasalis says of the measure which requires mortgage applicants to qualify for their loans at a higher interest rate than they are signing on for.

As he sees it, there’s just one problem. “The problem is, it was probably too much, too quick.”

The new mortgage rules have come at a time when mortgage rates are on the rise. Pasalis, president of the Realosophy brokerage, notes how the Bank of Canada has hiked the overnight rate five times over the past six quarters. That, together with the stress testing, has added 300 basis points to the qualifying rate for homebuyers.

Pasalis highlights how much the lending landscape in Canada has changed for borrowers over the past 10 years.

“Policymakers thought extending credit to households was a great idea,” says Pasalis, noting that a decade ago consumers had access to 40-year amortizations.

Today, amortizations are capped at 25 years and a stress test has come with higher interest rates.

“I think it’s a lot in a relatively short period of time, especially over the past 18 months, to introduce these measures, and I think you can’t sort of shift the underlying philosophy of how you’re lending to consumers significantly without there being consequences,” says Pasalis.

The stress test has been commonly cited as one of the main causes of the Canadian housing market cooldown that played out last year. Experts have estimated that the stress test eats away at a mortgage applicant’s buying power by about 20 percent.

In commentary posted to Twitter, Pasalis speculated that policymakers may ease stress testing if the Canadian housing market continues on its downward trajectory this year.

Already, he suggests, a significant number of borrowers are turning to private lenders, who typically charge higher interest rates but are not mandated to impose a stress test. “As a result, they are paying much higher rates for their debt, spending less, [and] saving less.”

Sarah Niedoba

The dream of owning a home in many of Canada’s largest cities has become increasingly out of reach for the average would-be buyer. And according to a new survey, the majority of Canadians think the government should be doing more to help.

Up to 71 percent of Canadians believe that the federal government should be doing more to curb runaway home values, according to a new survey conducted by real estate website Zoocasa.

“Renters felt the strongest regarding this, at 81 percent, while 64 percent of homeowners support government intervention,” reads the report. “Renters also show the strongest support for programs helping first-time buyers get into the market (75 percent, compared to 49 percent of homeowners.”

The results are part of a broader trend found in the survey — homeowners tend to feel more positive about the current state of the housing market than renters. This was especially true of long-term homeowners, defined by Zoocasa as those who had owned their property for 10 years or more.

Up to 43 percent of long-term owners said they currently live in their “dream home,” compared to just 24 percent of new homeowners and 7 percent of renters.

Meanwhile, 47 percent of new homeowners and 66 percent of renters indicated that they would be unable to afford their current home if affordability conditions continue to worsen. Up to 28 percent of renters said that higher interest rates would impact their ability to buy property.

Yet despite these numbers, the majority of respondents were in agreement that owning a home is an important life milestone.

“A full 81 percent of long-term owners, followed by 77 percent of short-term owners, and 63 percent of renters [indicated as such],” reads the report. “The desire to upgrade housing was also very strong among those who rent: 92 percent indicated they intend to eventually buy a home, with 59 percent planning to do so over the next five years.”

Linda Nguyen, The Canadian Press

Home prices across the country are expected to rise in 2019, but only at a moderate pace compared with recent years, according to two of Canada’s largest residential real estate brokerages.

Royal LePage is anticipating the national median home price will increase by 1.2 per cent in 2019, with prices in Toronto and the surrounding areas expected to rise 1.3 per cent to $854,552.

Home prices in Greater Vancouver are forecast to go up by just 0.6 per cent to $1.29 million, while home prices in Montreal and the nearby region are expected to see the largest rise out of Canada’s biggest cities, with home prices anticipated to jump three per cent to $421,306 in 2019.

Royal LePage CEO Phil Soper said the national housing market is expected to remain in a “correctional cycle” that began this year, with home prices appreciating at a “snail’s pace.”

“Markets aren’t perfect. They overshoot and then they must correct,” he said in a statement.

The Royal LePage report blamed the “tepid pace” of price growth on a number of factors including rising interest rates, global trade risks and the low price of Canadian crude.

It noted that would-be buyers who had for years been shut out of hot markets in Toronto and Vancouver may have a bigger opportunity to purchase in 2019. It says it expects a jump in sales activity come spring.

Meanwhile, in a separate report Tuesday, Re/Max said it expects average home sale prices to go up by 1.7 per cent in the new year.

It also anticipates housing markets across the country will stabilize as Canadians feel a bigger impact from higher interest rates.

“Demand isn’t as strong as it was in the past but it is still very, very strong,” said Christopher Alexander, executive vice-president and regional director of Re/Max of Ontario-Atlantic Canada.

“The government has said it may not be as conservative with raising rates as they have been in the past. That’s why there’s uncertainty. People don’t really know what to expect.”

Re/Max expects average home sale prices in Vancouver to fall three per cent next year, after increasing two per cent this year.

The report forecasts that some smaller cities outside of the big urban areas will see large price growth, with London, Ont., leading with a projected increase of 17 per cent, followed by Chilliwack, B.C., and Windsor, Ont., at 13 per cent.

Alexander said a more stable real estate market is positive for both buyers and sellers.

“The threat of a bubble bursting isn’t around the corner, and at the same time, there is going to be a little bit of an appreciation so people will get a return on their investment,” he said.

“We’re in healthy territory right now and homebuyers and sellers can feel confident that the market shouldn’t’ go too drastically in either direction.”

Pete Evans – CBC

The Bank of Canada has decided to keep its benchmark interest rate unchanged while it digests the impact of its previous policy decisions and effect of drastically lower oil prices on the economy.

The central bank revealed Wednesday it will keep its benchmark interest rate — known as the target for the overnight rate — at 1.75 per cent. The bank raised its rate to that level in October, the fifth time since the summer of 2017 that it decided to hike.

The bank’s rate directly affects the rates that Canadian consumers get from retail banks. When the central bank increases its interest rate, it makes borrowing more expensive — but it’s good news for savers.

None of the economists polled by Bloomberg were expecting an increase this time around, but watchers wondered what the bank would have to say about the plunging price of oil.

The price of the Canadian oilsands crude blend known as Western Canadian Select dipped as low as $14 US per barrel since the bank last met, while U.S. blends never fell below $50. If prices persist, the impact on the broader economy could be enough to warrant a change in monetary policy.

The Alberta government has implemented an emergency cut to production levels to boost prices, and the bank took note of the issue in its statement Wednesday.

“In light of these developments and associated cutbacks in production, activity in Canada’s energy sector will likely be materially weaker than expected,” the bank said.

Economists who monitor the bank zeroed in on the oil comments, among other things. “A GDP hit is coming due to Alberta’s production cuts,” Scotiabank economist Derek Holt said.

The bank will next meet in the new year to reassess rate policy. Trading in investments known as overnight index swaps implies there’s a one in two chance of a rate hike when that happen, but Bank of Montreal economist Benjamin Reitzes is among those who thinks another hike is no sure thing.

“Looking ahead to January, the [Bank of Canada] will likely need to be convinced to hike (rather than not to hike), so we’ll need to see a solid run of data and oil prices at a minimum hanging in there,” he said.

Toronto-Dominion Bank analyst Brian DePratto suggested it could be a while yet.

“We no longer expect the Bank of Canada to hike its policy interest rate in January,” he said. “Spring 2019 now appears to be the more likely timing, allowing for the Bank to ensure that the growth narrative is back on track.”

Currency investors also seemed to be lowering their expectations of more rate hikes to come. The Canadian dollar plunged more than half a cent when the decision came out, dipping below the 75 cent US level to its lowest level since May 2017.

All things being equal, a rate hike would send a country’s currency higher, because it makes assets denominated in Canadian currency more valuable.

Natalie Wong,

Bloomberg News

Canada’s home builders are urging the federal government to loosen mortgage-lending restrictions that have helped cool housing markets this year.

Executives at Mattamy Homes Ltd., North America’s largest closely held home builder, said the rules have brought about the desired soft landing and aren’t needed as much now that interest rates are rising. The Canadian Home Builders’ Association said the rules are hitting millennials and struggling markets like Calgary particularly hard.

The rules, put in place in January, require even those with a 20 per cent down payment, who don’t need mortgage insurance, to prove that they can make payments at 2 percentage points above the contracted rate. The so-called B-20 stress tests already existed for insured mortgages. By April, the average home price in Toronto had tumbled 12 per cent from the same month the prior year, though has since stabilized.

“We’re going to continue to lobby for a pullback now on B-20,” Brad Carr, chief executive officer of Mattamy Homes Canada, said in an interview at Bloomberg’s Toronto office. “That had a very targeted outcome. It’s been achieved so its kind of overkill now.”

As rates rise “they’re doing their natural job and that 2 per cent spread, we certainly hope the government will either remove it or at least cap it,” Carr said. Peter Gilgan, founder and CEO of Toronto-based Mattamy Homes, added that a reduction to 1.5 per cent or 1 per cent would make sense.

“Ideally at this point the best thing would be for the new stress test to be repealed, just removed,” David Foster, director of communications at the CHBA said. “Markets like Calgary, they’re already quite soft, are just hammered by this.”

Foster said the restrictions are disproportionately affecting young first-time buyers and the longer the rules are in place the more disenfranchised that age cohort is going to be. The stress tests also perversely tend to push people into open variable rate mortgages or the non-regulated space, neither of which are without significant risk to the borrower, he said.