The housing market is cooler and Canadians are taking on less debt — but there is one downside

Canada has some of the highest household debt levels in the world, but last week a new report from Statistics Canada found that that could be starting to change.

The country’s household debt-to-income ratio fell to 168 per cent in the first quarter of 2018, after reaching a historic high of 170.5 per cent in Q3 2017.

“[The decline hints] that [the] household debt-to-income ratio might have turned a corner last year after increasing fairly steadily for decades,” writes RBC senior economist Robert Hogue, in his latest note.

The decline has everything to do with a new mortgage stress test, which came into effect on January 1, according to Hogue. The test has cooled the housing market significantly, leading to month after month of year-over-year sales drops and prices. The cooler market restrained growth in mortgages outstanding to its weakest rate in 17 years last quarter — just 4.5 per cent.

But there is a slight catch to this good news. Canadian households’ net worth also dipped slightly in the first quarter of 2018, as the values of their property started to fall.

“The dip in households’ net worth resulted from a marked slowdown in asset growth,” notes Hogue. “Household assets grew at their slowest pace in nine years in the first quarter, as a cooling in Canada’s housing market curbed the growth of real estate assets significantly.”

Households’ real estate holdings rose by just 1.3 per cent in the first quarter, representing the weakest increase since the 2008-2009 recession.

Still, the drop in household assets isn’t something to be overly concerned about, according to Hogue. Or at least, not yet.

“The flip side of a cooler housing market…is that slower growth in the value of real estate holdings tempers the asset side of the ledger and causes households’ net worth to erode slightly,” explains Hogue. “Still, this shouldn’t be a big worry at this stage considering how much both assets and net worth increased over the past several years.”

Economists predicted that the Canadian housing market would warm up by spring — here’s what they’re saying now

The first quarter of 2018 was dominated by economic forecasts calling for a rough first quarter for the Canadian housing market, followed by a recovery in the spring.

But spring has come and gone, and Canadian home sales are still slumping on a year-over-year basis, while prices in most markets remain stubbornly flat.

While provincial housing policy and a rising interest rate environment have a role to play in the market’s slumping performance, most economists blame a new mortgage stress test introduced on January 1 for the current state of affairs.

So when will the market finally adjust to said test? It depends who you ask.

“We held the view until now that the transitory effect of the stress test implemented on January 1 would start to wane by the spring,” wrote senior economist Robert Hogue, in a note earlier this month. “Well, there was no indication of any material rebound in home resale activity through May.”

Hogue writes that while he had initially predicted that home sales would drop by 4.3 per cent year-over-year in 2018, that number could double by the end of the year.

Meanwhile, Scotiabank senior economist Marc Desormeaux is predicting that a recovery is still on the way, just later in the year.

While in April he wrote that sales appeared to be “bottoming out” and that following the first quarter contraction he predicted a “modest but broad-based recovery of sales activity [in the second quarter],” he is now predicting that the recovery will happen later in the summer.

“An early-year slowdown in Canadian housing market activity persists in the wake
of rising interest rates and mortgage stress tests that came into effect on Jan. 1st,” he writes, in a recent note, before predicting a “modest recovery…later in 2018.”

Not every economist is adjusting their forecast. TD economist Rishi Sondhi wrote in a recent note that May’s sales numbers largely matched his earlier predictions.

“On balance, this was a better-than-expected report,” he wrote of May’s sales numbers, in a recent note. “All told, the figures support the notion that markets are stabilizing after significant volatility in the early part of the year related to the implementation of updated [mortgage rules].”

Sondhi adds that impacts from mortgage rule changes tend to be “rapid, but also transitory,” which means a recovery could be around the corner.

“Going forward, we expect activity to find support and begin to recover very gradually in the second half of the year,” he writes. “While rising borrowing costs will weigh on activity and prices, the housing market should nonetheless improve, supported by low unemployment, rising wages, and healthy population growth.”

Calgary Offices at Emptiest in a Decade Despite Oil Rebound

Even as oil prices trade near the highest in four years, offices in the capital of Canada’s energy industry are about as empty as they’ve been since at least 2008.

The office vacancy rate in Calgary climbed to about 23 percent in the first quarter of this year, up from 20 percent a year earlier, according to a report from Toronto-based Altus Group Ltd. The increase is partly due to the completion of 2.5 million square feet of office space in the year through March, the real estate consulting firm said.

Demand has lagged as well. First-quarter sales of office-investment properties plunged 83 percent, according to Altus. Overall investment-property sales slumped 28 percent in the first quarter, a C$295 million ($222 million) drop from a year earlier.

While global oil prices have rebounded over the past 12 months, Canadian crude’s discount to the U.S. benchmark has widened in that period, hurt by a shortage of pipeline space. That’s restrained producers from ramping up output and led to continued job cuts at companies including Cenovus Energy Inc.

Foreign buyers tax on trial for alleged discrimination — but B.C. claims crisis called for action

Chinese citizen claims property levy discriminates against non-Canadians, in breach of Constitution

A landmark civil trial kicked off Monday testing the legality of a foreign buyers tax enacted by the province of British Columbia in response to a housing affordability crisis.

The legal battle pits the government against a proposed class of foreign nationals who claim they’ve been discriminated against in violation of the Canadian Constitution.

A lawyer for the province told B.C. Supreme Court Justice Gregory Bowden the volumes of argument, affidavits and authorities on display in his courtroom belied the very simple set of circumstances that gave birth to the law.

“There was an affordability crisis in the Greater Vancouver real estate market,” Karen Horsman said as she laid out the justification for the tax.

“Local residents were in effect being priced out of the market.”

Is the tax legal?

Introduced in July 2016 under the previous Liberal government, the tax initially required foreign entities (including foreign nationals) to pay an additional 15 per cent on the purchase of residential property in Greater Vancouver.

The current NDP government increased the amount to 20 per cent in February and expanded its reach to include the Fraser Valley, Capital Regional District, Nanaimo Regional District and the Central Okanagan.

Then B.C. Liberal Finance Minister Mike de Jong unveiled the foreign buyers tax in 2016 as part of a number of initiatives aimed at cooling the housing market. (Simon Charland/CBC)

In an unusual turn of legal proceedings, the province has asked Bowden to determine whether or not the tax is legal in a summary trial — as opposed to beginning with a certification hearing on the class action.

They’ll argue that the tax is not in breach of the Charter of Rights and Freedoms.

And that even if it were, the infringement is the kind of reasonable limit allowed given the pressing need for political action in the face of the housing crisis.

‘Those are condensed?’

The plaintiff, Jing Li, is a Chinese student who moved to Canada in 2013 to complete a master’s degree in public administration.

Weeks prior to the introduction of the tax, she claims she signed a contract for the purchase of a $559,000 home in Langley.

She says the foreign buyers tax added an additional $83,850 to her bill.

In a summary trial, the province has asked B.C. Supreme Court Justice Gregory Bowden to rule on the legality of the foreign buyers tax. The fate of the proposed class action will be determined from his findings. (David Horemans/CBC)

Li wants the tax declared illegal and is looking for the restitution of hundreds of millions of dollars collected by the province from foreign nationals like herself in the past two years.

The small courtroom on the third floor of the Supreme Court building was relatively empty considering the high-profile nature of the debate which led to the proceedings.

Li’s legal team consists of five lawyers, including Joseph Arvay, a noted Constitutional expert who is currently assisting the province as external counsel in its battle over the Trans Mountain pipeline.

Horsman is one of three lawyers arguing on behalf of B.C.. She began by calling Bowden’s attention to the mountain of “condensed” legal volumes laid out in front of him.

“Those are condensed?” he asked.

‘A smokescreen and not a theory’

But Horsman said the issue at hand was actually fairly straightforward: “The big picture can tend to get lost when the court is asked to get down in the weeds.”

She said the court should consider the situation preceding the introduction of the tax.

The province claims the Greater Vancouver real estate market had become one of the most unaffordable in the world by 2016. (CBC News)

By July 2016, the benchmark price of a single family home in Greater Vancouver had risen to $1.2 million. The annual rate of house price inflation had reached nearly 30 per cent, an amount that far outpaced the growth in local income.

As a result, young families couldn’t afford to buy homes. The future looked uncertain and while there was undeniably more than one factor, public commentary increasingly pointed to foreign demand as a significant part of the problem.

“By 2016, Vancouver was not only the most unaffordable real estate market in Canada,” Horsman said. “Vancouver had become one of the most unaffordable real estate markets in the world.”

Horsman noted that markets around the world — Sydney, Melbourne, Hong Kong and London — saw prices rise as housing came to be seen more as an investment than a place to live.

The former B.C. Liberal government introduced the foreign buyers tax in 2016 as a measure to curb rampant price inflation in the housing market. (CBC)

She claimed all those factors contributed to the legitimacy of the government’s concern and the need to act.

She accused Li of clouding the issue by referring to historic discriminatory acts like the Chinese head tax as a way to suggest the foreign buyers tax is motivated by racism.

“That … is a smokescreen and not a theory,” Horsman told the judge. “There is nothing nefarious or racist in a government enacting measures that apply to all foreign buyers.”

Duelling experts

Both sides came armed with affidavits from a slew of economists and professors to buttress their arguments.

Two of the most widely quoted academics on the subject — both attached to the University of B.C.’s Sauder School of Business — were cited in the days’ proceedings.

Tsur Somerville was retained by the province and Thomas Davidoff by Li.

Horsman sought to use Davidoff’s words from media interviews against him in order to undermine doubts the plaintiffs have raised about effectiveness of the tax.

Her written arguments include a quote from an interview in July 2016 in which Davidoff called the tax “a win” for the Liberals.

Analysis from one of the province’s experts concluded the tax has had its desired impact, cooling the residential market.

Horsman will spend the next two days outlining B.C.’s case. Li’s lawyers are expected to begin their arguments on Thursday.

Zillow to feature Canadian Century 21 listings this year

For now, Seattle-based real estate mega site Zillow is targeting only American eyeballs for Canadian properties through a new deal that gives it a direct feed to Century 21 Canada listings.

The company announced Wednesday that it expects to feature Canadian real estate, including the Century 21 listings, later this year.

The Zillow Group’s sites and apps, including Zillow.com and Trulia.com, draw about 175 million eyeballs a month.

Century 21 has 265 Canadian franchises with 400 offices here listing about 26,300 properties.

“We know U.S. buyers are interested in purchasing Canadian real estate, so we’re excited to offer the millions of buyers already coming to Zillow for their home search an easy way to see homes for sale in Canada and connect with an agent to help navigate the sale,” the company’s Vancouver-based chief industry development officer Errol Samuelson says in the release.

But it is unclear how far Zillow’s Canadian ambitions extend longer term.

It is foremost a media company that generates revenue by selling ads next to real estate listings. But Zillow has been testing a program called Instant Offers in Phoenix, Las Vegas and Orlando where Zillow connects home sellers with potential investor buyers or an agent to help sell their home. The idea is to provide consumers with convenience and help them confirm their selling price and timing in the market.

In Phoenix, Zillow is also trying a model where it purchases homes itself.

Although the press release says Zillow is talking to Multiple Listings Services and real estate boards in Canada, it doesn’t say whether it will be able to publish the same depth of information it offers on American properties where it lists the selling prices of homes.

“The big thing they’re known for — at least if you ask a regular person in the U.S. — is how much homes are sold for,” said Keith McSpurren, CEO of TheRedPin, a Toronto-based online brokerage.

The Toronto Real Estate Board (TREB) has been fighting in court for years to prevent password-protected broker websites from publishing the sales prices of properties. The courts have ruled in favour of those online brokerages being able to publish sold data. But TREB is now asking the Supreme Court of Canada to consider hearing its arguments for overturning those lower court rulings.

“I’m not surprised (Zillow) is coming into Canada. They’ve got a desire to basically map the world with all the homes that are available,” said McSpurren.

But Zillow Group’s edge is its scale rather than innovation, whereas TheRedPin is using software and artificial intelligence to try and improve real estate transactions for consumers and agents, he said.

McSpurren says Zillow’s main focus in the U.S. industry is for lead generation and that doesn’t pose a threat to the Canadian industry at this point. It sells ads to agents so that when a consumer clicks on a property, an agent’s ad pops up on the screen.

The Instant Offer idea is a “very different business model” — the idea that buying a house can be as simple as buying a car or other items is an interesting idea. But it is a “very different business model” that requires a lot of capital and it changes the risk profile of the business dramatically, he said.

“I don’t think you’ll see that showing up in Canada until they prove it in the U.S. first,” said McSpurren.

The Canadian Real Estate Association’s Realtor.ca is the most popular online home listing service in Canada.