Housing markets set for another summer of discontent — and mortgage rules are to blame
Housing markets continue to struggle in Canada.
The April sales numbers are in and they are not pretty. Housing markets across Canada are still struggling to ward off the stresses induced by tightening regulations by federal and provincial authorities.
The spring thaw many had expected in housing markets didn’t realize. The sluggish trends observed in April suggest that when it comes to housing markets, it is likely to be another summer of our discontent.
April usually marks the beginning of intense housing activity in Canada. As the temperatures climb and snow melts away, homebuyers emerge from the winter slumber in search of deals.
Another reason for the intense sales activity in April is because unlike other products, searching for a house takes much longer. Often, families spend two to five months searching for a home, arranging finances, and finalizing the move. Furthermore, families with children are further constrained as they would rather relocate when schools are closed for summer vacations.
For families to relocate in July or August requires them to make a purchase in April or May giving them enough time to manage the logistics, which often includes the sale of the existing home.
Thus, housing markets are usually up in April and May, registering a greater share of sales and experiencing modest to high increases in housing prices.
However, housing market statistics reported by Canadian Real Estate Association (CREA) for last month are devoid of such exuberance. Across Canada, housing prices were down 11.3 per cent when compared with April 2017. At the same time, housing transactions were also down by 13.9 per cent.
Even when one excludes housing market activity in the greater Toronto and Vancouver areas, where housing price fluctuations have been more extreme, housing markets in other parts of the country still reported a 4 per cent decline.
Some would argue that April 2017 may not be a good benchmark given the rapid escalation of housing prices in the greater Toronto area. Thus, a comparison with sales and prices in March maybe more suitable. A month-over-month comparison also reveals that housing markets have been struggling across Canada as CREA reported a 3 per cent decline in sales from March to April of this year.
Where as aggregate housing prices experienced a decline, the same is not true for condominiums, which continued to register an increase in prices. CREA reported that apartments experienced a 14.7 per cent increase in prices while single-family housing experienced a decline.
The resilience observed in condominium prices might be surprising to those who had warned against an oversupply of high-rise dwellings, especially in Toronto and Vancouver. It appears that changes in mortgage regulations are benefiting condominium sales because households under new regulations could qualify for lower prices that are more commonly found for condominiums.
Industry insiders hold the stress test, which requires borrowers to qualify for a higher mortgage rate than the contractual rate, and provincial taxes to discourage foreign homebuyers, responsible for the uncertainty and decline in housing markets. The stress test became effective on Jan. 1 and was expanded to cover uninsured mortgages issued by lenders regulated by the Office of the Superintendent of Financial Institutions (OSFI).
Industry observers were of the view that some mortgage business might flow to lenders not regulated by OSFI, such as provincially regulated credit unions and alternative lenders including Home Capital. Initial response to the stress test suggests that not much lending has transferred to the others. The stock market performance and valuation of alternative lenders is indicative of a lack of heightened market activity.
Listings present another riddle in housing markets. While the sales have been down in almost 60 per cent of the local markets, so are the listings. Some argue that the homeowners are unwilling to list homes when prices are down from their historic highs. This might be true. But what is equally interesting is that listings were also low in 2016 and early 2017 when housing markets recorded steep price escalations.
It was then argued that homeowners were waiting for the market to peak and hence hesitated to list their homes. The constrained supply, as a result, in the resale market further fuelled housing price escalation. And when the markets peaked in April 2017, especially in the Greater Toronto Area, homeowners responded, albeit a little too late, a month later by listing homes in large numbers. It appears that when it comes to market timing, many owners are out of step with the markets.
Murtaza Haider is an associate professor at Ryerson University. Stephen Moranis is a real estate industry veteran. They can be reached at www.hmbulletin.com.