Canadian real estate has been red-hot in recent years, and it’s for that reason that nobody can argue 2018 has been an uneventful year.
The biggest story of the year has been the Office of the Superintendent of Financial Institutions’ Guideline B-20 that stress tests new mortgage originations 200 basis points. However, should borrowers want to shop around their existing mortgage for a better rate, they too will be subjected to the stress test, effectively handcuffing them to their current lender.
“In five years, people will mortgages up for renewal will be used to it—anybody who refinanced or purchased would have qualified under the stress test—but it’s these people coming due in the next two, three years: they’re the ones who will have a terrible time,” said Doreen Walsh, First National’s regional sales manager for Ontario and Atlantic Canada.
During the second quarter of 2018, refinances in the private mortgage channel surged 67% over the same quarter in 2016. It’s just one reason why Benjamin Tal, deputy chief economist of CIBC World Markets, believes B-20 has set a course of unchartered territory.
“I supported B-20 because I believe we need to save from Canadians from themselves,” Tal said in October, during a keynote speech at the National Mortgage Conference in Montreal. “However, I do believe that, at this point, alternative lenders are the fastest growing segment of the mortgage market. They’re transferring risk from the regulated part of the market to the unregulated market. They’re transferring risk from where there’s light to where it’s dark.”
Vancouver and Toronto cool
The two most frenzied housing markets in the city finally cooled in 2018, largely because of B-20, but in the Vancouver’s case also because British Columbia’s provincial government implemented a series of cooling measures. The provincial government increased the foreign buyer tax from 15% to 20% and introduced a 2% vacancy tax to curb speculation. Vancouver is also hobbled by demand vastly outpacing supply.
“Vancouver has slowed down based on concerns of government intervention and a shortage of inventory, so people are on the sidelines and there’s a mismatch between buyers’ and sellers’ expectations on price, and activity level has slowed down,” said Sotheby’s International Realty Canada’s President and CEO Brad Henderson. “Product stays on the market longer and sells at a discount of what it would have been at the end, even the beginning, of 2017.”
Toronto, meanwhile, felt the weight of the new mortgage stress test and the market went cold until about June, when it briefly rebounded before cooling again during autumn. Like Vancouver, Toronto cannot get housing supply to market fast enough to satisfy demand, and as a result, prices have not come down. Fewer homes are being listed because the mortgage stress test has reduced choice.
“[Toronto] is suffering from lack of inventory because people are afraid that if they sell their house they won’t be able to find anything else,” said Henderson.
Montreal attracts foreign buyer attention
In the wake of B.C. increasing its foreign buyer tax by 25%—not to mention Toronto’s existing 15% tax on international buyers being dissuasive—Montreal has become a hotbed of foreign speculation.
But according to Carrie Law, CEO of Juwai.com, a Chinese international real estate website, Montreal probably won’t supplant Toronto.
“If you are asking, will buyers fall in love with Montreal and lose interest in Toronto, the answer is no. Montreal is a wonderful destination that deserves a good deal more international investment than it now receives. Toronto has demand drivers that won’t disappear, including the English language, educational system, and job market.”
Interest rates are rising
Canada is officially in a rising rate environment and that could make stress testing mortgages a tenebrous affair for a great many Canadians. It’s also led to Tim Hudak, CEO of the Ontario Real Estate Association, to call for the stress test’s annulment.
“Every economist may not agree on the timing, but interest rates are heading up, which means mortgage rates are heading up, and if you add 200 basis points onto every increase, you’re really pushing a lot of first-time homebuyers out of the market and impairing the dreams of move-up buyers who have kids and want a little more space,” he said.
“Our point of view at OREA reinforces the federal government to take a second look at the stress test because every time the interest rate goes up, the stress test goes up 200 basis points above that, making it even harder to get a mortgage and penalizing millennials, new Canadians and entrepreneurs trying to get into the housing market,” continued Hudak. “We certainly support government programs that encourage responsible and sustainable borrowing, but this pile-on of all kinds of new rules, regulations and taxes harms aspiring homeowners and sets back the potential of our economy.”