New OSFI regulations and a requirement for more open data have changed the rules
By Pete Evans, CBC News Posted: Jan 02, 2018 5:00 AM ET Last Updated: Jan 02, 2018 9:08 AM ET
A real estate sign stands in front of a house for sale in Ottawa in August 2017. With some big changes on the horizon, housing topics are likely to dominate Canadian headlines again this year. (Chris Wattie/Reuters)
Real estate was a major topic in the business world in 2017, and with some big changes on the horizon, the subject is likely to dominate headlines again this year.
Here are five things to watch in Canadian real estate.
Policy-makers in Toronto and Vancouver have taken steps to try to curb activity in a perceived problem: foreign buyers gobbling up houses as investment vehicles, driving prices up for everybody else.
Vancouver slapped a 15 per cent tax on foreign buyers in late 2016, and Toronto followed suit in April of last year with a similar policy.
The impact on both markets was immediate, as sales and prices fell, although they have since both rebounded.
Despite those moves, don’t expect the issue to dissipate this year. Statistics Canada got money to study foreign buyers in the last budget, and in December, the data agency published its most authoritative numbers on non-resident investment in real estate.
Both cities still have less than five per cent foreign ownership, the numbers show, but market watchers in both cities say that segment is growing, and the issue is worthy of more study before any rash decisions.
“In places like Toronto and Vancouver,” CMHC’s chief economist Bob Dugan told CBC in an interview recently, “there’s been very strong growth in houses prices. So people became concerned with trying to get that in check.”
Worries like that haven’t dissipated since the taxes have come in, so expect more attention to the topic this year.
Stress test rules
As of yesterday, new rules aimed at making sure borrowers can pay off their mortgages if rates were to rise are in effect.
Last fall, the country’s top banking regulator OSFI announced changes that will force lenders to “stress test” mortgage applicants, to make sure they aren’t borrowing too much. Prospective borrowers will now have their finances mocked up assuming rates are at one of the following two scenarios — whichever is higher:
- Two percentage points higher than whatever rate they are able to get from a lender.
- At the five-year average posted rate, according to the Bank of Canada, which currently sits at 4.99 per cent.
Anyone who fails the test can’t get the loan they are applying for, which means they’ll have to either buy something less expensive with a smaller mortgage or sit out entirely.
It’s not just a concern for first-timers either, and it could lead to a surge in unregulated lending, said Ratehub Inc. co-founder James Laird.
“Canadians who need to refinance and no longer qualify will be forced this way, while some who are looking to purchase and no longer qualify with a regulated lender will choose to go this way,” Laird said.
That’s far from the universal view, however. While the OSFI rules are significant, economist Doug Porter at the Bank of Montreal says he expects the market will largely be able to withstand the impact of new stress tests, just as it has withstood other policy changes.
“Canada’s housing market has defied the incessant talk of its imminent demise for years,” Porter said in a recent report. Which is why this year, he expects the housing market to “exceed expectations, even with the new tighter OSFI rules, yet again crushing the bears’ calls, if not their spirits.”
The stress tests are based on the notion that interest rates are set to rise, and there’s ample evidence to suggest that’s likely to come true.
After sitting on the sidelines for the better part of a decade, the Bank of Canada hiked its benchmark interest rate twice last year.
Bank of Canada Governor Stephen Poloz is widely expected to raise interest rates a little in 2018. (Chris Young/Canadian Press)
Investors think there’s better than 50 per cent chance of another increase as soon as this month, and more could follow.
- ANALYSIS: Interest rates are going up — for real
Laird says he expects two rate hikes this year, and the bank is likely to pause for a brief spell after the first one. The bank’s rate is currently at one per cent, and while ratcheting it up to 1.5 per cent by the end of the year may not sound like much, that would make variable rate mortgages more expensive than they’ve been in nine years.
As TD Bank economist Michael Dolega put it: “Higher mortgages, amid continued Bank of Canada interest rate hikes, will be a significant headwind on Canadian housing activity in 2018.”
More data on home sales
Another trend to watch is the outcome of a long dispute between Canada’s largest association of real estate brokers and a federal competition watchdog that has been fighting them for years to make data on home sales easier for the public to access.
In early December, an appeals court upheld a previous decision ordering the Toronto Real Estate Board to stop hoarding data on home sales. The Competition Bureau had argued that keeping information about how much homes sold for, along with other information, forces would-be sellers to work with a real estate broker to get it, which drives up costs to the benefit of no one but the broker.
The court ruling won’t be the end of the fight: the board has up until the end of January to appeal the decision all the way to the Supreme Court — something they’re expected to do.
While the fight is localized to the Toronto market, TREB represents almost 50,000 brokers, so its influence is substantial. As Toronto realtor John Pasalis told CBC News in a recent interview, the TREB case “will probably have ripple effects nationally. You’ll probably start seeing this with other boards as well.”
Ultimately, however, all these trends boil down to one fundamental question: will prices keep going up?
Not surprisingly, opinions on the matter are a little divided. But there’s a broad consensus that the national housing market is on track to crank out more gains — even if they are smaller than many owners have gotten used to.
Ratehub’s Laird says he expects a flat market nationally. “The macroeconomic factors that have been driving price appreciation will persist in 2018,” Laird said, citing strong demand and a growing economy. But higher interest rates and limits on foreign buyers, plus the stress test rules, “will act as an effective counter-balance, causing no net change.”
- ANALYSIS: 4 reasons house prices refuse to fall
TD’s Dolega agrees, saying in a note to clients recently that “we anticipate a continuation of the soft-landing narrative that has so far characterized dynamics in Canada’s housing market.”
After years of double-digit gains, 2018 is likely to be a bit more muted, Bank of Montreal economist Robert Kavcic says, adding that rate hikes and the new OSFI rules “should keep the froth from returning.”