Mortgage stress tests impact Canadian property market more than expected

Many housing markets in Canada are struggling due to recently introduced mortgage tests for buyers with sales likely to see less growth than expected in 2018, the latest forecast report suggests.

The new mortgage stress test announced last October had been expected to cause buyers to rush purchases in advance of the new rules coming into effect in January, resulting in fewer transactions in the first half of 2018.

But so far this year there is evidence that the effect has been stronger than expected with sales in March, April and May, usually the busiest months of the year, falling to a nine year low, according to the report from the Canadian Real Estate Association.

It points out that sales momentum has not yet begun to rally and as interest rates are widely expected to rise further this year and next, sales have been hit although CREA is still forecasting that they will grow modestly in the second half of 2018 as housing market uncertainty diminishes.

Taking these factors into account, the national sales forecast has been revised downward and is now projected to decline by 11%. CREA says that the decrease almost entirely reflects weaker sales in B.C. and Ontario amid heightened housing market uncertainty, provincial policy measures, high home prices, ongoing supply shortages and this year’s new mortgage stress test.

The national average price is projected to ease to $499,100 this year, little changed from CREA’s previous forecast and a decline of 2.1% from 2017. Only Newfoundland and Labrador’s average price is expected to post a decline of that size, while more than half of all provinces are forecast to see increases. The national average price reduction reflects fewer transactions in B.C. and Ontario.

The average price decline forecasted for Ontario of 1.7% largely reflects fewer higher-priced home sales in Toronto, particularly during the important spring market which usually sees a seasonal jump in the average price but which failed to materialize this year. While this seasonal pattern is expected to resume in 2019, the boost to the annual figure from the spring surge has been absent this year.

Meanwhile, home prices in Eastern Ontario, Quebec, New Brunswick, Nova Scotia and Prince Edward Island are expected to continue rising following steadily firming market conditions in recent years. British Columbia is also now forecast to see its average price rise in 2018, as prices in the province have been more resilient than previously expected.

Home prices are forecast to edge down by 1% in Alberta, by 1.5% in Saskatchewan and by 2.9% in Newfoundland and Labrador. In the latter two provinces, supply remains historically elevated in relation to demand.

In 2019, national sales are forecast to rebound modestly to 474,800 units but remain below annual levels recorded in 2014 through 2017. The anticipated partial recovery in sales over the second half of 2018 from deferred purchases over the first half of the year in Ontario and B.C. is subsequently expected to fade over 2019 as interest rates continue to rise.

This trend is also predicted to occur in other provinces but be most pronounced in B.C. and Ontario, where transactions have fallen sharply over the first half of 2018 despite a supportive economic and demographic backdrop for housing demand.

The national average price is also forecast to rebound by 3.8% to $518,300 in 2019, reflecting an expected return to normal seasonal patterns for spring sales activity and prices in Ontario housing markets.

Market balance is continuing to firm in Quebec, New Brunswick, Nova Scotia and Prince Edward Island. Further modest price increases in these provinces are forecast in 2019, with price gains held in check by rising interest rates.

Meanwhile, prices in Alberta, Saskatchewan, Manitoba and Newfoundland and Labrador are forecast to remain stable from 2018 to 2019.