The real reason the government has introduced stringent mortgage stress testing, claims a mortgage broker, is because it wants Canadians to spend less money on mortgage payments and more on other segments of the economy.

“The government sees Canadians making their mortgage payments as a problem because they won’t spend their money in other sectors of the economy,” said Dustan Woodhouse. “If the economy contracts just a little bit, Canadians who have big mortgage payments will continue making them and won’t spend money elsewhere in the economy.”

The problem, according to Woodhouse, does not exist, but the government thinks it will.

“I really believe they’re trying to fix a problem that doesn’t exist. They’re fearful it will exist, but I genuinely believe the greatest threat to the Canadian economy and real estate sector is government overregulation. The government has made too many changes too fast. I’ve never seen government make changes at the pace they’re making them at, and with so little industry consultation. They’re not giving things time to settle in. I’m a little worried they’re pushing on the brake pedal harder than they realize.”

Moreover, the Office of the Superintendent of Financial Institution’s mandate, says Woodhouse, is to protect the stability of the banking system.

He also decried the scapegoating of foreign buyers, whom he says aren’t culpable for escalating unaffordability. With demand vastly outpacing supply, properties have become even hotter commodities than usual, and now the stress tests will put them even further out of reach.

“How is the government helping you by reducing your purchasing power by 20%, thereby reducing your ability to compete with foreign buyers—because foreign buyers don’t have to qualify under the same guidelines as you and I do,” he said. “You qualify for less today at a 3% interest rate than you could 15 years ago when it was 6%. This is the irony people don’t understand.”

Jennifer Souvanvong, a mortgage broker with Blue Pearl Mortgage Group, who’s licensed in Alberta and B.C., says she’s noticed restaurants and shops closing down in North Vancouver because it’s become too expensive.
“People can’t afford to live there because property values are too high, so shutting out buyers doesn’t make sense,” she said.

Ultimately, if B-20 backfires on the government Souvanvong says opposition parties will pounce and turn it into a hot-button issue in time for election season.

“Maybe the government backs off a bit if it negatively affects the real estate market,” said Souvanvong. “When election time comes this might be a hot topic. I think the opposition parties will use this as a platform because this affects everybody.”

Canada’s strong economy is set to continue into 2018 but it – and the housing market – are set to moderate.

In its latest Economic Outlook, RBC says that although Canada’s economic growth will lead the G7 nations, it will fall from 2017’s predicted 2.9% GDP growth to 1.9% in 2018, followed by 1.6% in 2019.

“Canada’s robust growth in 2017 is likely to moderate somewhat in 2018 as key economic drivers shift, but we still anticipate the economy will continue to outperform its potential,” said Craig Wright, Senior Vice-President and Chief Economist at RBC.

The housing market was one of the key drivers of Canada’s economy in 2017 but for next year there will be a shift to business investment and government infrastructure spending.

The cooling of the housing market which has already begun in recent months will continue with mortgage underwriting rules tightening, and interest rates rising to 1.75% by the end of 2018 RBC forecasts.

All provinces are forecast to grow their economies in 2018 but generally at a slower pace than in 2017. However, RBC expects Saskatchewan and Newfoundland and Labrador to buck this trend with growth exceeding that of 2017.

The decision of the Bank of Canada to hold interest rates at 1% has left economists, lenders and homeowners guessing as to what will happen next.

Governor Stephen Poloz noted that inflation was slightly higher than expected, slack remains in the labour market, and the housing market is moderating as forecast.

However, he gave little guidance on when another rate rise may occur. Instead he said the BoC was cautious while noting that interest rates will need to rise over time.

Reacting to the news, CIBC Economics’ Avery Shenfeld said that rates could rise by just 50 basis points in 2018 even if the BoC decides to make an increase in January rather than CIBC’s forecast for April.

Meanwhile, Alicia Macdonald, principal economist of The Conference Board of Canada was more bullish: “…with the economy growing in step with the Bank’s forecast, economic capacity rapidly diminishing, and an acceleration in wage growth, we expect that the Bank will continue to gradually increase interest rates throughout next year.”

The highly anticipated November Labour Force Survey, released this morning by Stats Canada, surpassed all forecasts breaking multi-year records. Employers added a whopping 79,500 jobs last month, bringing the gains over the past 12 months to nearly 400,000. November’s data posted the most robust job market since the 2008-09 recession as the jobless rate plunged to 5.9% in November, down from 6.3% in October. Average employment growth of 32,500 per month over the last year is the fastest pace since 2007. The 5.9% jobless rate, was only lower for a single month before the recent recession—a time when the economy was operating beyond its longer-run capacity limits.
Employment grew across most industries led by manufacturing, retailing and education. Construction jobs increased for the second consecutive month. The employment increase in November was mainly among private sector employees, as both public sector employment and the number of self-employed was little changed.

The employment gain for November is the 12th straight, the longest since the 14-month span that ended in March 2007.

Some of the most substantial gains were in central Canada, with Quebec’s unemployment rate falling to 5.4%, the lowest level on record back to 1976, and Ontario’s at the lowest level since 2000 at 5.5% (see table below). The national jobless rate of 5.9% has fallen 0.9 percentage points over the past 12 months.

Great news for the consumer was the 2.8% November increase in average hourly earnings, up from 2.4% in October and the fastest rise since April 2016. Much of that increase has come in the last few months as wage growth accelerated sharply—finally a bit of evidence that tight labour market conditions are feeding through to wages. If that trend holds up, it will be hard for the Bank of Canada to remain on the sidelines much longer.

One piece of contrary evidence was a sizeable drop in average hours worked that retraced much of the gain seen in recent months. The Bank of Canada has flagged below-trend hours worked as a sign of labour market slack, but other indicators point to very tight job market conditions. The strength of the job market will no doubt impact the Bank of Canada’s assessment. The Canadian dollar surged on today’s news.

Q3 GDP Growth Slowed

The strong jobs market has been reflected in the rise in consumer spending, noted in another report released today by Stats Canada, helping to offset the slowdown in exports and housing. GDP growth in the third quarter slowed to 1.7%, down sharply from the 4.3% gain in the prior three months. This slowdown was expected as the Q2 pace of expansion was unsustainable. The Bank of Canada estimates that the longer-term potential growth rate is close to 1.7%.

GDP growth in Q3 continued to be concentrated in household spending with a stronger-than-expected 4.0% increase that built onto a 5.0% surge in Q2. Government investment spending also jumped higher, though, and business investment rose for a third straight quarter — albeit at a more modest pace than over the first half of the year. Offset came from a large, but expected, pullback in net trade.

Exports fell sharply in the third quarter subtracting 3.4 percentage points from the growth rate. The decline was mainly attributable to motor vehicles and parts (-9.0%), primarily passenger cars and light trucks. Imports were virtually unchanged.

Household spending represents a record proportion of the overall economy (see chart below). The compensation of employees increased 1.3% in nominal terms in the third quarter, a quicker pace than in the previous 11 quarters. Wages and salaries rose 1.9% in goods-producing industries and 1.1% in services-producing industries. Regionally, Ontario and Quebec continued to fuel wage growth in the third quarter.

Housing investment weakened, posting the first back-to-back quarterly decline in investment in residential structures since the first quarter of 2013. Ownership transfer costs, which reflect activity in the resale housing market fell sharply for the second consecutive quarter.

Monthly GDP data, also released this morning, were perhaps more encouraging than the quarterly data regarding near-term growth implications. September GDP rose a stronger-than-expected 0.2% (nonannualized) to more-than-retrace a 0.1% dip in August. That left somewhat stronger momentum at the end of the quarter than we previously assumed. The data are still pointing to a slowing in underlying GDP growth from the outsized pace from mid-2016 to mid-2017 but is also still fully consistent with the Bank of Canada’s view that growth will be sustained at a modestly above-trend 2% pace going forward.

The Canadian economy’s most significant vulnerabilities remain to be inflamed housing prices and unprecedented household debt levels, according to the latest report from the Bank of Canada.

This is despite several signs that financial risks have begun to ease, the Bank’s study noted.

“Better economic conditions and several new policy measures support prospects for additional progress,” BoC noted in the report, as quoted by the Financial Post.

“Our financial system continues to be resilient, and is being bolstered by stronger growth and job creation, but we need to continue to watch financial vulnerabilities closely,” Governor Stephen Poloz said in a written statement released alongside the Bank’s November Financial System Review.

Read more: Why B20 is a blessing, not a curse

Canada’s economy saw the fastest growth rate among G7 countries with its 4% growth in the first half of 2017. The surge was driven in part by some fiscal stimulus measures introduced by Ottawa, along with higher business investment, improved exports, and consumption spending. However, this trend is expected to wind down by the end of the year and through to 2019.

Meanwhile, the rate of borrowing has increased by around 5% per cent compared to a year ago, significantly outstripping wage growth. Household debt levels have ballooned in response to outsized growth of real estate prices, especially in markets like Vancouver and Toronto.

However, the BoC report noted that recent developments might suggest that policy changes like mortgage stress tests have started to reduce Canada’s financial risks. The bank said that the tightened rules introduced by the Superintendent of Financial Institutions (OSFI) will restrict as much as 10% of prospective Canadian homebuyers, representing approximately $15 billion in loans every year.

The Organisation for Economic Co-operation and Development (OECD) agreed with the assessments in its November economic outlook, which warned that the red-hot housing market and burgeoning household debt levels remain key risks to the economy.

The OECD added that the impact of Vancouver’s foreign buyers’ tax has diminished, suggesting that Toronto’s tax could have a similarly limited effect on prices.

“Provincial government measures have also temporarily slowed house price growth, but some – notably Ontario’s expanded rent controls – risk discouraging the supply of new housing. Macro-prudential policies will need to be tightened further if rapid increases in house prices and debt resume.”