Mortgages Stress Tests Are Slowing Canadian Real Estate Market

The head of one of the country’s largest and most influential real estate bodies has made a strong case to one of the nation’s foremost regulatory bodies to ‘revisit’ its support of stress tests. The head of the Toronto Real Estate Board has complained that stress tests are too cautious and are having an extreme dampening effect on the market.

As a reminder to our readers, stress tests were implemented by the federal government in 2017 to reduce risk of poor mortgage lending and to shore up the housing market.

Stress tests scrutinize mortgage buys from prospective buyers with deposits at less than 20% of the purchase price and with no mortgage insurance. Stress tests provide incentives to purchase mortgage insurance, which can be costly, and add another layer of analysis to the already comprehensive mortgage approval process. Canada’s already notoriously conservative banks were made even more scrupulous with the introduction of the stress test.

Stress Test Have Dampened Demand

Stress tests were designed to demonstrate whether a low deposit mortgage could withstand a 2% added interest rate cost from the BOC. The effects of these stress tests have been to dampen demand. Research has shown that stress tests effectively blocked up to 100,000 first time home buyers from being approved for a mortgage. They were supported by risk-averse bureaucrats and economists who fear a housing bubble and who are worried about the quality of mortgage issuance in the country.
In response to these complaints, the OSFI, or Office of the Superintendent of Financial Institutions, Canada’s core banking regulator, stated that it will be sticking to the stress tests. In addition, it made the point that the stress test adds a margin of safety that is ‘prudent.’ With weakening real estate data spreading around the country, pressure from real estate bodies and experts on regulators and the Bank of Canada will continue. 

Interest Rate Increase Is Imminent

Interest Rate Increase Is Imminent

higher interest rate sign

Prepare for another increase in interest rates on Jan. 17th, the date of the Bank of Canada’s next monetary policy announcement (decision on rates). It is Tembo’s prediction that the possibility of another hike from 1% to 1.25% is extremely high. While it is possible that the Bank will hold off on a hike until later, given the recent release of some important economic statistics, the likelihood of a hike is sky-high. Economists, bankers, and the media are all anticipating a hike.

interest rate increase

Low unemployment is the likely precursor to a hike

  In December of 2017, the Canadian economy added 79,000 jobs, lowering the country’s unemployment rate to 5.7%, the lowest in over 40 years. Every region of the country added jobs, with most of the growth in Quebec and Alberta. Most of the jobs were full time and private sector, another sound aspect of the increase. More jobs will increase spending and will further add pressure to inflation, which is creeping up, albeit very slowly. The consensus among experts was that the Bank of Canada would wait for the latest employment statistics before making its decision and essentially every economist was amazed at the sheer number of jobs created. The Canadian dollar surged to almost 81 cents on the strong news.

CDN Dollar rate

Job market is booming

The sectors that are seeing the most job creation are services and manufacturing, public sector job growth which was strong in 2017 is beginning to decrease. Across the country, job numbers are growing and there is a growing diversification away from construction and energy related jobs which is a positive sign. January jobs numbers will be interesting as they will reveal if so much of the reduction of unemployment was seasonal due to the holiday season. Either way, higher interest rates will make it more expensive for Canadians to acquire mortgage debt, especially first-time buyers.

unemployment rate

Now Creative Group November 14, 2017 No Comments

The Market Rebound Begins

In a promising sign that the traditionally positive seasonal effects of Fall on the real estate market are once again kicking in, October sales of homes in Toronto rose over 12% from September figures. The increase will be well received by realtors and prospective sellers, as it shows that the market is showing renewed resilience and that demand and buying potential remains firm. Growth in October is usually expected by teal estate professionals in a usual year, but the 12% increase is slightly stronger than usual metrics.

Prices for average homes also increase slightly, hitting roughly $780,000.00. Prices have been increasing for very conservative but the October increase shows an acceleration from September numbers – again, this is a very promising sign. The increase in prices and sales shows that a market that had faced rapid and dramatic cooling from a long list of government and regulatory measures after peaking in May is once again begin the slow but steady process of warming up again.

While sales and prices are slowly returning to health, concerns about a continued large gap in the supply of homes versus still shy demand remain with close market watchers and realtors. The gap may be bad for those wanting to sell, but benefits buyers, who at the height of the market in May were hard pressed to get a bid in a prospective home, let alone a fair shot of sealing the deal with a buy. The large amount of supply continues to place downward pressure on sales and price growth.

Condo market surge continues

As a previous Tembo blog has outlined, the condominium market in Toronto remains very strong and shows strong price and demand growth. Although many pockets of the GTA have lukewarm and slow condo markets, the overall market, and particularly activity in the core continues to surge. Average October prices increased over 20% in October. The average price of a condo in Toronto now exceeds $520,000.00

As Tembo has repeatedly stated, the fundamental underlying pillars of the GTA real estate market remain firm and strong, and in the long term, the market will continue to be resilient and will continue to offer opportunities for buyers and sellers.

Now Creative Group November 13, 2017 No Comments

The Rebound We’ve Been Waiting For

After having been walloped by a combination of new taxes, higher interest rates, tougher financing rules, and a massive glut of housing listings, the Toronto housing market showed positive signs of resilience and recovery by posting a 6% increase in re-sale home prices in August from September. Market watchers and realtors pointed to the increase as a good sign the market was finally pulling out of a period of price stagnation, low buyer interest, and dampened demand.

Many officials, market watchers, and financial and real estate professionals predicted the market would begin to recover and that prices would increase again in the beginning of fall. The news that this has been confirmed is yet another sign that the Toronto real estate market is in good shape and that it has strong underlying fundamentals. New listings numbers are also beginning to fall, meaning the supply of new homes is dropping, this is another positive trend for sellers who had a very tough summer selling season.

The price increase brought the average September price to $775,546.00, $20,000.00 more than the same price last year. The rebound mirrors long term trends in Vancouver, where a foreign buyer tax gutted demand and prices for almost a year, only to see prices and demand rebound and exceed past levels later. Market watchers are now eager to see if the positive trend continues into the middle of the fall and whether interest rate hikes and tighter insurance rules from federal regulators further increase pressure on the fragile market.

Housing starts increasing in urban areas

The market is responding to strong economic growth and still reasonably low borrowing costs. Urban housing construction is on pace to reach its strongest level since 2007 with a 8% increasing in urban detached housing starts which exceeded 60,000.00 units in August-September.

Now Creative Group October 6, 2017 No Comments

Stress Tests May Squeeze Homebuyers

Home buyers could lose a quarter of their home buying power if federal officials get their way in establishing guidelines to prevent people from borrowing too much. Federal officials are proposing stress testing uninsured mortgages. Uninsured mortgages are ones with a 20% minimum down payment. The government is wary about the financial sustainability and serviceability of these mortgages if interest rates rise.
If stress testing becomes a norm, it will reduce the ability of Canadians to borrow money and take on mortgage debt, and will place enormous pressures on an already pressured market to respond. Developers will see their pool of potential customers decreased, and demands for cheaper housing, which is already high, will continue to increase.
The federal agency responsible for stress tests in the financial system is the Office of the Superintendent of Financial Institutions (OSFI), located in Toronto with offices around the country. OSFI’s mandate is to ensure that risk and contagion in the financial system is a low as possible. One particular area of concern has been the long-term reality of low-interest rates and their impact on mortgage insurance, banks, overall debt in the country, and the stability of the financial system.
While many recent changes to regulation, down payment standards for housing purchases, and interest rate increases have added stability and cooled what was an inflamed market, OSFI continues to work towards tougher and tighter standards in anticipation of future market risks. When recently questioned about the state of the housing market and the need for tougher measures, Federal Finance Minister Bill Morneau made the point that he felt enough had been done and that further action was not necessary for the time being.
With future interest rate rises on the horizon and the possibility of stress tests, it is clear that regulators are weary and vigilant about the potential risks to Canada’s housing market – a market that has become crucial to economic activity and the livelihoods of hundreds of thousands.

Now Creative Group September 18, 2017 No Comments

After the Rate Hikes

The Government of Canada is carefully examining the effects of two rapid Bank of Canada rate hikes on the economy, the real estate market, and consumers. The immediate impact of the hikes saw prime mortgage rates increase across the entire spectrum in Canada, with variable rate mortgage holders affected the most. The rate hikes will likely slow down economic momentum, cool the housing market, and encourage consumers to keep on eye on their borrowing and spending habits – which were the intentions of the rapid hikes to begin with.

The economic data to be released in the next few weeks will likely influence the Bank’s decision on rates in October. There is a strong expectation that the Bank will likely increase rates again, as its position has become very hawkish. If the economic and real estate data is exceedingly poor and falls flat of baseline expectations, the Bank is likely to send warmer signals to the market that it will take its time on rates and raise them in a more gradual way over the medium to long term.

Governments around the world are very sensitive to interest rates. Increases that are too fast and too significant can significantly dampen economic growth and can spawn considerable resentment and unpopularity amongst voters. One of the key indicators of a government losing an election is the trajectory of interest in the run up stages. Federal Finance Minister Bill Morneau did not appear to voice his intention or opinion to act further on cooling the housing market. Interest rates in Canada are set by the Bank of Canada, which is fully independent of the government and which has complete and total purview over monetary policy.

Now Creative Group April 26, 2017 No Comments

Sold your house in 2016? Don’t forget to claim it on your taxes

Canadians didn’t used to report the sale of their home, but this has changed since the Liberal government introduced new federal mortgage rules back in October. If you fail to claim the sale of your primary residence, you could face up to $8,000 in penalties.

 “Starting this tax-filing season, a home sale that took place after January 1, 2016 needs to appear on your income tax return” Global News, Erica Alini 

 

 Here is what you need to know

 You still get the principal residence tax exemption
Although you will not have to pay a capital tax gains on the proceeds you made from the sale of your home, you will have to report the sale in order to claim the exemption.

Report the sale on schedule 3
You will have to provide information such as when you bought the home, when you sold it, how long you’ve been living there and how much you made off the sale. You will also have to include a general description of the home.

If you didn’t live in the house the entire time you owned it…
In that case, you will have to file Form T2091.

 If you rent part of your house or use it for business…
You might still be able to claim it as your primary residence. Read more about this here.

If you forget to report the sale this year
You should file an amended return as soon as you can. The CRA can impose a penalty of $100 for every full month since the filing deadline, capped at $8,000. For the first year, the agency has said they will only apply the penalty “in the most excessive cases”. If you don’t file, you won’t be eligible for the capital gains tax exemption.