Is there a housing shock looming in Canada?

Peter Dolezal

Peter Dolezal

Over the past several years, both the Federal Government and the Bank of Canada have taken significant actions aimed at cooling Canada’s housing prices. The intent was to engineer a soft landing for residential real estate, and avoid a very disruptive price-bubble burst.

The B.C. and Ontario governments also weighed in with a 15 per cent extra tax on properties sold to non-resident buyers in the Greater Vancouver and Toronto regions.

Rising interest rates in the past 12 months have produced a best-available 5-year mortgage rate increase of about 0.5 per cent, from 2.5 per cent to approximately 3 per cent. Rising prime rates have had an immediate impact on holders of variable-rate mortgages.

A new “Stress Test” for high-ratio mortgages forced those borrowers to qualify based on the posted five-year fixed rate, rather than on the rate they were actually able to negotiate – thus substantially reducing borrowing capacity, particularly for the first-time buyer.

The effect of these efforts? In many areas, the upward price spiral has definitely moderated, and in some price ranges, even reversed. Not enough however, in the eyes of the Federal Government.

On January 1, 2018, the perhaps most consequential change in mortgage lending regulations will take effect. Not only will the high-ratio borrower need to qualify based on the greater of the five-year published benchmark rate, OR the lender’s actual offered rate plus 2 per cent (whichever is higher), but also, this rule will apply to ALL mortgages, new or renewed, even if the down payment exceeds 20 per cent. Extending the stress test to all holders of new mortgages, rather than only those with minimal down payments, could have very substantial consequences for both housing demand and prices. In fact, this one change could result in a far greater impact than all the other changes of the past several years, combined.

Since the announcement of this latest change, mortgage brokers confirm that applications for mortgage approvals have spiked, as potential buyers strive to qualify under the “old” rules. Potential buyers have realized that the new regulation could reduce their mortgage qualification value by as much as 20%. It is difficult to imagine that such shrinkage of borrowing capacity will not have a significant impact on housing demand nation-wide and hence, prices.

A bit of good news for existing mortgage holders is that an exemption to this new rule exists if they choose to renew their mortgage with their current lender. However, should they decide to move their mortgage to a lender offering a better rate, they will be subject to the new stress test. The result for some existing borrowers, will be less mobility with their mortgage, and hence less negotiating power with their current lender. Hardly a winning result for the borrower.

Pre-approved mortgages will minimize the effect of this latest change in the first quarter of 2018, but thereafter, the full impact is likely to be felt. Because housing demand is bound to weaken as the new year progresses, sellers may be wise to price realistically, to achieve a sale in the next few months. Another drag, beyond this new stress test, is the high likelihood of several more interest rate increases in 2018.

We can only hope the federal government’s intent to achieve a soft landing for the real estate market does not overshoot its objective, causing a major reversal in demand, and significantly dampening economic activity across Canada.

A retired corporate executive, enjoying post-retirement as an independent Financial Consultant (www.dolezalconsultants.ca), Peter Dolezal is the author of three books, including his recently-released THIRD Edition of The SMART CANADIAN WEALTH-BUILDER.

Just Posted

Processed sewage is still being deposited at the Hartland landfill rather than sent as biosolids to a Richmond cement plant. (Black Press Media file photo)
Biosolids at Hartland still being placed on landfill in Saanich

Richmond cement plant up and running, but CRD end product not suitable for purpose

An SUV sits where it crashed through the front window of the 2:18 Run store in Fairfield Plaza, after the driver appeared to lose control on Monday afternoon. (Photo by Phil Nicholls)
Driver crashes through front window of Victoria running store in Fairfield

Phil Nicholls of 2:18 Run said crash sounded like an earthquake at first

Elk Lake Drive area resident Michael Blayney protests a proposed multi-building development for his Royal Oak neighbourhood, outside Saanich municipal hall on Monday (June 14). (Photo by Megan Atkins-Baker/News Staff)
Demonstrators protest 11-storey development on Elk Lake Drive in Saanich

Saanich locals gather at municipal hall to protest development, public hearing goes Tuesday

Seismic upgrading and expansion work at Victoria High School is about a year behind due to pandemic-related factors, the Greater Victoria School District announced. (Photo by Cole Descoteau)
Victoria High School seismic work, expansion a year behind schedule

Greater Victoria School District now targeting September 2023 for reopening of historic school

The Greater Victoria Harbour Authority is calling on Transport Canada to rescind its ban to Feb. 28, 2022 on cruise ship stops in Canada, to allow planning to begin in advance of a reopening of the cruise industry next year.
Greater Victoria Harbour Authority seeks end to federal ban on cruise ship stops in Canada

Greater Victoria Harbour Authority CEO hopes cruises will resume by 2022

Canadian Prime Minister Justin Trudeau participates in a plenary session at the G7 Summit in Carbis Bay, England on Friday June 11, 2021. THE CANADIAN PRESS/Adrian Wyld
Canada donating 13M surplus COVID-19 vaccine doses to poor countries

Trudeau says the government will pay for 87 million shots to be distributed to poor countries

Kelowna-Lake Country MLA Norm Letnick, assistant deputy speaker at the B.C. legislature, presides over committee discussions. The legislature is completing its delayed spring session this week, with most MLAs participating by video conference. (Hansard TV)
B.C.’s daily COVID-19 infections dip below 100 over weekend

Only 68 new cases recorded Monday, four additional deaths

Neighbours fight a small late-night bush fire with garden hoses and shovels in Cinnabar Valley on June 5. They couldn’t get help from local fire services because the fire was located in an area under B.C. Wildfire Services jurisdiction. (Photo courtesy Muriel Wells)
Neighbours on edge of Nanaimo city limits left to put out bush fire themselves

Cinnabar Valley residents tackle fire with hoses and buckets for two and a half hours

Darren Campbell’s truck (pictured) was stolen when he stopped to check on a car in a ditch on Cowichan Bay Road on Monday morning. (Facebook photo)
Vancouver Island Good Samaritan’s truck stolen in nasty trick

‘Try to be a Good Samaritan and my $20,000 truck gets stolen right under my nose’

The Kamloops Indian Residential School is photographed using a drone in Kamloops, B.C., Monday, June, 14, 2021. The remains of 215 children were discovered buried near the former school earlier this month. THE CANADIAN PRESS/Jonathan Hayward
Communities grapple with what to do with former residential and day schools

Some tear them down as a tool to help healing, others repurpose them as tools for moving forward

Creative handmade signs abound at the June 13 Tofino rally for old growth trees. (Nora O’Malley photo)
VIDEO: Tofino stands in solidarity for Fairy Creek Blockades

Over 150 supporters attend rally hosted by Friends of Clayoquot Sound

FILE – Provincial health officer Dr. Bonnie Henry talks about B.C.’s plan to restart the province during a press conference at Legislature in Victoria, Tuesday, May 25, 2021. THE CANADIAN PRESS/Chad Hipolito
B.C. watching U.K.’s COVID struggles but don’t think province will see similar pitfalls

Studies show that one dose of vaccine is only 33 per cent effective in preventing B.1.617.2 spread

RCMP Const. Shelby Patton is shown in this undated handout photo. RCMP say that Patton was hit by an allegedly stolen truck that he had pulled over on Saturday morning in Wolseley, east of Regina. THE CANADIAN PRESS/HO, RCMP
Pair charged in Saskatchewan Mountie’s death make first court appearance

Const. Shelby Patton was hit by an allegedly stolen truck that he had pulled over Saturday morning

David and Collet Stephan leave for a break during an appeal hearing in Calgary on Thursday, March 9, 2017. THE CANADIAN PRESS/Todd Korol
Appeal Court rejects stay for Alberta couple facing third trial in son’s death

Pair accused in their earlier trials of not seeking medical attention for their son sooner

Most Read