Revisions to the stress test would help slower housing markets

Anyone looking for more proof a national housing market exists only in mortgage lenders’ vaults and bureaucratic hallways should review the June report from the Canadian Real Estate Association (CREA).

Yes, mortgage providers, most operating across the country, must look at their businesses from a national perspective. If one area of the country is doing well and another is not, there’s a good chance the bottom line is balanced.

However, if one or two markets are over-heated, leading to soaring home prices and distorting national averages, the bureaucracy imposes regulations to cool the national average, not just the two markets causing the distortion.

Such is the federal mortgage stress test, introduced 18 months ago and targeted specifically to put the brakes on the Greater Toronto and Greater Vancouver housing markets.

One can debate how successful the test has been.

Toronto slowed temporarily, but is now rebounding.

Vancouver’s housing market slowed as well and has yet to show signs of recovery. (In addition to the stress test imposed at the federal level, the B.C. government added other taxes to the housing market, which may be just as responsible for the slowdown.)

In June, Vancouver saw prices decline by 10 per cent, while in Greater Toronto prices increased roughly four per cent, year over year.

What is not debatable is how the stress test severely affected markets, including Calgary, that were already slow due to economic challenges.

The June CREA report measures housing statistics in 18 markets across Canada and shows sales were relatively flat, as a result, says CREA, of “an even split between the number of local markets where sales were up and those where they were down. Larger monthly gains were generally focused in the province of Quebec and in Southern Ontario. Those gains were offset by declines in a diverse mix of markets across Canada, including Greater Vancouver, Calgary, Halifax-Dartmouth and the province of Newfoundland and Labrador.”

“Sales activity is strong in New Brunswick where I do business, but it’s a very different story in B.C., Alberta and Saskatchewan,” says Jason Stephen, CREA’s president. “All real estate is local. Nobody knows that better than a professional realtor, who is your best source for information and guidance when negotiating the sale or purchase of a home.”

In addition to lower sales as a result of the stress test, the housing supply in markets in the Prairie provinces has reached historic highs as owners have listed their homes before prices deteriorate further.

Benchmark prices were down by four per cent in Calgary, three per cent in Edmonton, four per cent in Regina and one per cent in Saskatoon.

Prices will show no gains until economic fundamentals return to better balance, says Gregory Klump, CREA’s chief economist.

“There’s a growing divergence in Canadian housing market trends between eastern and western Canada,” says Klump. “While sales activity in Canada’s three westernmost provinces appears to have stopped deteriorating, it will be some time before supply and demand there becomes better balanced and the outlook for home prices improves.”

Real improvement will take some time, says Robert Hogue, senior economist with RBC Economic Research.

“Despite early signs of recovery emerging recently, market conditions remain quite soft in Western Canada,” says Hogue. “In June, home resales were 34 per cent below the 10-year average in Vancouver, and 19 per cent and 16 per cent below in Regina and Calgary, respectively.

“Buyers are in control across most of the western region, keeping property values under downward pressure.”

The price declines in June were less severe than previous months, says Hogue.

“In the case of Calgary, Edmonton and Saskatoon, this represented a further slowing in the pace of decline, which we believe augurs well for these markets to stabilize later this year,” he says.

“Vancouver prices, however, will take longer to stabilize given the many layers of policy actions currently being deployed to cool the market. Yet prices aren’t at risk of spiralling out of control as demand and supply have become better aligned in the past couple of months.”

These market will, at best, remain flat, says Hogue.

“We see little in the near term to fire up the markets significantly,” he says. “We expect demand-suppressing policy measures, as well as stretched affordability in key markets to keep things relatively cool. This is sure to disappoint those hoping for a snapback in activity, especially out west. But it should be viewed as part of the solution to address issues of affordability and household debt in this country.”

Hogue doesn’t see lower mortgage rates resulting in more buyers passing the stress test.

“There’s no doubt that mortgage rate declines since the start of this year have contributed to stabilize Canada’s housing market, yet we see little risks that these declines will bring the market to a boiling point again,” he says. “That’s largely because the mortgage stress test’s qualifying rate has levelled off since March when it reached the Bank of Canada average five-year posted rate (of) 5.34 per cent. So the drops in mortgage rates since March, and any further drops, won’t help qualify more buyers.

“Moreover, we’d expect policy-makers to tighten rules further at any sign of potential overheating in Toronto or Vancouver.”

Everyone agrees those markets need controlling, but markets experiencing tough economic conditions with little signs of a recovery soon do not.

Taking this into account, the stress test needs to be revised.



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