Canadian home resales saw their largest year-over-year decline in January since 2015, have mortgage rules overshot their mark?
Canadian Home Resales See Weakest Month Since 2015
The Canadian Real Estate Association (CREA) reported on Feb. 15 that home sales via Canadian MLS® Systems climbed 3.6% in January compared to December, however, actual (not seasonally adjusted) sales were down 4% from year-ago levels and turned in the weakest January since 2015. They also came in below the 10-year average for the month on a national basis and in Canada’s three westernmost provinces, Ontario and Newfoundland & Labrador.
The association said that approx. 23,968 properties were sold through the Multiple Listing Service in January, down from 24,977 a year earlier.
“Sales, market balance and home price trends are out of synch among major Canadian cities that have the greatest impact on national results,” said Gregory Klump, CREA’s Chief Economist. “It’s clear that housing market conditions remain weaker in the Prairie region and the Lower Mainland of British Columbia.
Notwithstanding the intended consequences, tighter mortgage regulations that took effect in 2018 combined with previous tightening will weigh on economic growth this year.”
The number of newly listed homes edged up 1% in January, led by a jump in new supply in Greater Vancouver and Hamilton-Burlington.
With sales up by more than new listings, the national sales-to-new listings ratio tightened to 56.7% compared to 55.3% posted in December. This measure of market balance has remained close to its long-term average of 53.5% for the last year.
There were 5.3 months of inventory on a national basis at the end of January 2019, in line with its long-term average. That said, the well-balanced national reading masks significant regional differences. The number of months of inventory has swollen far above its long-term average in Prairie provinces and Newfoundland & Labrador; as a result, homebuyers there have an ample choice of listings available for purchase. By contrast, the measure remains well below its long-term average in Ontario and Prince Edward Island, consistent with seller’s market conditions. In other provinces, sales and inventory are more balanced.
CREA said the national average price for all types of residential properties sold in January was $455,000, down 5.5% from the same month in 2018 — the biggest year-over-year decline for a month since May 2018.
The MLS house price index — which adjusts for differing property types — was up 0.8% year-over-year, the smallest increase since June 2018.
In the Greater Vancouver area, the price index was down about 4.5% year-over-year but up 4.2% in Victoria and up 9.3% from a year ago elsewhere on Vancouver Island.
The index for the Greater Toronto Area was up 2.7% and up 6.3% for the Greater Montreal area, but down in Regina (minus 3.8%), Saskatoon (minus 2.0%), Calgary (minus 3.9%), and Edmonton (minus 2.9%).
Montreal Poised to Overtake Vancouver as Canada’s Second Largest Housing Market
Vancouver is on pace to lose its status as Canada’s second largest housing market to Montreal according to Bloomberg News. While still Canada’s most expensive city for housing, a recent collapse in sales has led the value of real estate transactions substantially lower. That leaves Montreal’s soaring market poised to overtake the Pacific coast city’s.
In January, the total dollar value of real estate transactions in Vancouver fell to $1.7 billion on a seasonally adjusted basis, the weakest level since 2013 and down 42% from a year earlier, according to CREA. Meanwhile, the value of transactions in Montreal reached $1.63 billion to start the year, an increase of 18% from last January. Montreal, which has much cheaper homes, but more transactions, hasn’t been this close to Vancouver since 2008.
Montreal is Canada’s second largest city by population. But it was left out of the boom that saw home prices in Toronto and Vancouver surge to levels that made those cities unaffordable and prompted a rush of regulations to slow down them down.
January saw home sales in Montreal climb the fastest in a decade as lower prices and a booming economy lured buyers. Sales in the city advanced 7.1% from December, the fastest pace since May 2009, and the number of units sold reached a record. Montreal’s gains are well ahead of identical moves in Vancouver and Toronto where sales rose 1.2%, and double the national increase of 3.6%.
There’s far less concern Montreal will show the signs of overheating seen in Canada’s two other major cities, given price differentials.
“Much of the recent price appreciation and sales increases, that really reflects the strength of the economy,” according to Bank of Nova Scotia economist Marc Desormeaux. “Montreal remains relatively affordable.”
Montreal’s benchmark home price was $349,300 in January, up 6.3% from a year earlier as noted above. That’s still far less than the Vancouver price of $1.02 million, which is down 4.5%.
Toronto still has by far the most real estate transactions, reaching $5.4 billion to start the year, albeit greatly reduced from the $8.5 billion in activity seen at the beginning of 2017.
Have Mortgage Rules Overshot their Mark
As noted above, the latest housing market stats show that housing sales and prices in January were lower than the ones recorded a year earlier.
In a recent Financial Post article by Ryerson associate professor Murtaza Haider and real estate industry veteran Stephen Moranis, the authors raise the concern that the impact of stringent mortgage regulations appears to be longer lasting than was initially expected.
In January 2018, housing sales declined after stricter mortgage regulations, including a stress test, were enacted. The January 2019 numbers are the first piece of evidence suggesting that the Canadian housing market slowdown is deeper rooted than a direct and immediate reaction to policy interventions.
The sustained slowdown in housing markets presents at least two alternatives to the government they state. The first alternative is to maintain the status quo and do nothing. The second alternative is to rethink the policy interventions made in the recent past and see if there is any new evidence that warrants a change in policy.
The decline in housing sales in January 2018 was expected. A whole host of new regulations designed to tighten mortgage lending became effective on the first day of January last year. Sales in December 2017 were higher than usual as households rushed to close deals to avoid being subject to stricter mortgage regulations a month later.
When January 2018 sales were 14.5% lower than the month before, there was no surprise, and the decline was attributed to the new stress test. Similarly, year-over-year sales were down 2.4% from January 2017.
The January 2019 sales figures are more disturbing Haider & Moranis note. Compared to the year before, sales last month were down by 4%. In fact, CREA revealed that sales in January 2019 have been the weakest since 2015.
In addition to sales, housing prices have also softened. The average house price across Canada was $455,000, 5.5% lower than the same time last year.
The January 2019 statistics offer the first opportunity to compare the annual change in housing market dynamics after the stress test came into effect. The decline in last month above and beyond what was observed a year ago is indicative of the fact that the markets are not merely reacting to new regulations, but the markets have embraced a more systematic response that is characterized by fewer transactions and lower prices the article states.
The weakness in housing markets also affects mortgage lending, a business The Big Five banks continue to dominate in Canada. The continued slowdown in housing sales may have influenced banks’ mortgage portfolios — the first signs of such an effect could soon be visible when the banks release their updated earnings report in the coming days.
The past few weeks have witnessed diverse voices both questioning and supporting the efficacy of the more stringent mortgage regulations. Some believe that stress tests are working fine. Phil Soper, CEO of Royal Lepage, thinks that the stress tests are needed “for the longer term health of the economy.”
Others believe that the stress tests have adversely impacted homebuyers who are either unable to buy at all or are forced to consume less adequate shelter space than they would have afforded in the absence of stress tests.
After reviewing the sustained decline in housing sales, Dave Wilkes, President and CEO of the Building Industry and Land Development Association (BILD), believes that the stress test “has overshot its target.”
BILD has advanced two proposals for the feds to contemplate. First, to consider lowering the stress test threshold that requires borrowers to qualify at 200 basis points above the contracted rate. As the interest rates have been revised upwards since the stress test was implemented, there is merit in reviewing the threshold.
Housing trade groups are also advocating to reintroduce the 30-year amortization for CMHC insured mortgages, which was available until July 2012.
First-time homebuyers are likely to benefit more from these changes. The ability to stretch the amortization period to 30 years lowers the monthly payment and allows many to participate in homebuying who would otherwise be forced to rent at a time when rental vacancy rates are at historic lows in large urban housing markets.
Critics of the 30-year mortgage point out its two obvious shortcomings. First, borrowers end up paying considerably more in interest. Second, longer amortization periods contribute to house price inflation.
Good public policy should be responsive and rooted in evidence Haider & Moranis conclude. Recent housing market data indicates that the impact of tighter mortgage regulations has been longer lasting than what most housing experts expected. A course correction might be a prudent way forward.