Canadian home sales fell to the lowest in more than five years in April, as tougher mortgage qualification rules deterred buyers.

The number of homes sold last month declined 2.9 percent from March, the Canadian Real Estate Association said Tuesday from Ottawa. Declines were recorded in about 60 percent of cities tracked including Vancouver, Calgary, Toronto and Montreal.

It was a disappointing start to the busy spring selling season for realtors that suggests markets are still struggling with tougher rules that require borrowers to prove they can afford to cope with higher interest rates. Policy makers made the changes along with other steps, such as foreign buyers taxes, to put the brakes on a surge in price gains last year that some fear could be a danger to the financial system.

The drop in April is the third monthly decline this year, with sales down over 20 percent since December. The new mortgage qualification rules kicked on Jan. 1.

“This year’s new stress test has lowered sales activity and destabilized market balance for housing markets in Alberta, Saskatchewan and Newfoundland,” CREA economist Gregory Klump wrote in the report. “This is exactly the type of collateral damage that CREA warned the government about.”

Even with the drop in sales, prices are still holding up. The benchmark index climbed 0.6 percent on the month, and is up 1.5 percent from a year ago.

The number of new homes listed for sale also declined 4.8 percent in April.

An important number that affects the ability of millions of Canadians to qualify for a mortgage has changed.

The Bank of Canada has raised its conventional five-year mortgage rate from 5.14% to 5.34%.

The rate is the one used for stress tests under the B-20 mortgage lending guideline so any borrower with less than a 20% down payment seeking mortgage insurance must be able to afford payments.

For those who do not require mortgage insurance, the rate is one of the two stress test benchmarks used, the other being the contractual mortgage rate plus two percentage points.

The Canadian Press says that the rate increase coincides with an estimated 47% of mortgages that are due for refinancing in 2018, based on a CIBC Capital Markets report.

The big five banks have also recently increased their 5-year FRM rates. When Toronto Dominion increased its rate is was called the “biggest move in years”.

According to one brokerage owner, the bureaucrats who determine mortgage lending rules are leading us down a path of reckoning.

“I think if they continue on with the restrictive policies they’ve been putting in place, they’ll get what they want: A housing collapse in Toronto and Vancouver. Then what are they going to do?” said Croft Axsen, owner of DLC Jencor Mortgage Corporation.

“I’m not saying they shouldn’t be trying to address housing prices in Toronto and Vancouver, but I think most of that has to do with supply. There’s this overall restriction throughout the entire economy about who can get a mortgage, how many people can get a mortgage, and how big the mortgage they can get is. I don’t think they understand what they’re doing. It makes me nervous that bureaucrats are making these decisions and not bankers.”

The B-20 guidelines have locked borrowers into their mortgages and impeded housing mobility. But most incredulous to Axsen is that existing mortgage holders have been displaced onto shaky ground. Irrespective of high Beacon Scores, they’re being punished.

Citing a client who paid down an $800,000 mortgage and still cannot move lest they substantially downsize, Axsen said, “The government has set up rules in which you can’t even qualify for the mortgage you have. Not only can’t you move, you can’t go to a different lender because they have to qualify you, so you’re stuck with your existing lender. You can’t compete to get yourself a lower interest rate on your house and you can’t sell your house for a different one because the government has deemed you’re not worthy, even though you have perfect credit and you’ve never missed a payment. Somehow, some bureaucrat sitting in front of a computer running a statistics program is telling the bankers how to qualify you to get a mortgage.”

Axsen added that he expects a stagnant economy to result from a considerably cooler housing market, in large part because—in a bid to rectify abnormalities in Toronto and Vancouver—smaller cities are suffering.

Shane Bruce of VERICO ACME Mortgage Professionals says people with modest incomes are bearing the brunt of the rule changes, while it’s business as usual for the well-heeled.

“I’m surprised homeowners aren’t complaining because the large portion of Canadians’ net worth is in their real estate equity, and we’re saying we’re all underfunded, too much debt and not enough pension, why would the government prevent their properties from appreciation?”

The Federal Open Market Committee (FOMC) met this week for the second time under the chairmanship of Jerome Powell. In a unanimous decision, the Committee left the target range for the federal funds rate unchanged at 1-1/2 to 1-3/4 percent. Unlike the Bank of Canada, which has a single objective of targeting inflation at roughly 2 percent, the Fed has a dual statutory mandate to both foster price stability and maximum employment.

U.S. labour conditions remain strong, and the economy continues to grow at a moderate pace. Inflation has now moved to close to 2 percent. The growth of household spending has moderated from their strong fourth-quarter pace, although business fixed investment continued to grow rapidly.

“The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

The yield on 10-year U.S. Treasury notes slipped slightly to 2.96 percent following the release of the statement, while the S&P 500 Index of U.S. stocks climbed to its highest level of the day and the Bloomberg Dollar Spot Index fell.

U.S. economic growth cooled in the first quarter to an annualized pace of 2.3 percent after averaging higher than 3 percent in the previous three quarters.

Expectations are that the Fed will hike rates once again at the next meeting in June. The Fed signaled in March that they expect to raise rates three or four times this year. They hiked the target federal funds rate three times last year and began to gradually reduce their holdings of securities.

The Bank of Canada will likely raise rates twice this year–probably in the summer and fall. As always, central bank policy will remain data dependent and will adjust with any significant changes in the economic backdrop. It is widely expected that the NAFTA negotiations will be satisfactorily completed in the near future, but that still remains a wildcard.

Increased U.S. protectionist fervour is a significant negative for the global economy. Today, 1,100 U.S. economists signed a letter to President Trump warning him of the dangers of tariffs, reminding him that the 1930 Smoot-Hawley tariffs led to a sustained economic depression.

Canadians have amassed a $2-trillion mountain of household debt that’s casting a big shadow over the timing of the Bank of Canada’s next interest rate hike, governor Stephen Poloz said in a speech Tuesday in Yellowknife.

To Poloz, the “sheer size” of debt burden also means its associated risks to endure for a while, although he’s optimistic the economy can navigate them.

The debt pile, he said, has been growing for three decades in both absolute terms and when compared to the size of the economy — and about $1.5 trillion of it currently consists of mortgage debt.

The central bank has concerns about the ability of households to keep paying down their high levels of debt when interest rates continue their rise, as is widely expected over the coming months.

“This debt has increasing implications for monetary policy,” he said in his address to the Yellowknife Chamber of Commerce.

Poloz has introduced three rate hikes since last July following an impressive economic run for Canada that began in late 2016.

But the central bank stuck with its benchmark rate of 1.25 per cent last month as it continued its careful process of determining the best juncture for its next hike. The bank’s next announcement is May 30, but many experts only expect Poloz’s next increase to come at July’s meeting.

Poloz said Tuesday that the volume of what Canadians owe is one of the key reasons why the bank has been taking a cautious approach to raising its trend-setting rate. He called it an important vulnerability for individuals and leaves the entire economy exposed to shocks.

“This debt still poses risks to the economy and financial stability, and its sheer size means that its risks will be with us for some time,” Poloz said.

“But there is good reason to think that we can continue to manage these risks successfully. The economic progress we have seen makes us more confident that higher interest rates will be warranted over time, although some monetary policy accommodation will still be needed.”

Poloz said debt is a natural consequence of several factors, including the combination of a strong demand for housing and the prolonged period of low interest rates maintained in recent years to stimulate the economy.

The governor also provided detail on issues the bank is examining as it considers the timing of its next rate increase.

If it raises rates too quickly, the bank risks choking off economic growth, falling short of its ideal inflation target of two per cent and could lead to the type of financial stability risk it’s trying to avoid, he said.

But if the governing council lifts the rate too slowly, Poloz said it could intensify inflationary pressures to the point it overshoots the bank’s bull’s-eye. Poloz added that moving too gradually could also entice Canadians to add even more debt and further boost vulnerabilities.

In his speech, he also noted several other areas of concern the bank is monitoring closely as it considers future hikes. They include the economic impacts of stricter mortgage rules, the ongoing uncertainty about U.S. trade policy, the renegotiation of the North American Free Trade Agreement and a number of competitiveness challenges faced by Canadian exporters.

“These forces will not last forever,” Poloz said.

“As they fade, the need for continued monetary stimulus will also diminish and interest rates will naturally move higher.”

The indefatigable ability of Canadians to shoulder an ever increasing mountain of debt is being tested.

The country’s biggest banks began raising key borrowing rates last week, just as the busy season for residential real estate gets underway. In addition, the mortgage market looks set for a particularly heavy year of renewals in an environment where debt-servicing costs are already rising at the fastest pace in a decade.

How well Canadian households can weather the squeeze has become one of the biggest questions for policy makers and will determine whether the economy is headed for a mild, or sharp, slowdown. Bank of Canad Governor Stephen Poloz will address the topic in a speech on Tuesday.

“The economy has never been as levered as it currently is, and the economy is far more interest sensitive than it has been in the past, to a degree that we don’t have certainty over how each interest rate hike is going to affect Canadian consumers,” Frances Donald, senior economist at Manulife Asset Management, said by phone from Toronto. “All we know is it’s going to be painful, but how painful isn’t quite clear.”

The heavy debt burden is one of the reasons the central bank has been reluctant to raise reluctant to raise borrowing costs further, after hiking interest rates three times between July and January. Given the nation’s debt load — as of February, households had a record C$2.1 trillion ($1.6 trillion) of mortgage and non-mortgage debt — Poloz estimates the economy is 50 percent more sensitive to rate hikes than in the past.

Here’s what households are up against:

Mortgage Season

Canada is entering its busy season for real estate, with purchases concentrated in the April to July window. Some 47 percent of existing mortgages need to be refinanced this year versus 25 percent to 35 percent typically, according to Ian Pollick, head of North American rates strategy at Canadian Imperial Bank of Commerce in Toronto.

At the same time, the country’s biggest banks are raising key mortgage rates. Toronto-Dominion kicked it off Thursday, hoisting its five-year fixed mortgage rate 45 basis points to 5.59 percent. Royal Bank followed with its own hikes Friday.

New mortgage stress tests are pushing some borrowers from the big banks to alternative lenders charging higher rates.

“That’s an unfortunate outcome of the stress test,” Will Dunning, an economic consultant who specializes in the housing market, said by phone from Toronto. “In that sense, the stress test is not reducing risk. It’s increasing risk.”

Cost of Debt

The vise is tightening. According to Statistics Canada, total payments on debt made by Canadian households rose 6.7 percent in the fourth quarter from a year earlier, and the interest-paid component climbed 9.2 percent. Those were the biggest gains since the financial crisis. A moving average of quarter-over-quarter changes shows a similar pattern, with the 1.62 percent increase in the latest period the fastest since 2008.

Debt payments now represent about 14 percent of household disposable income, the highest share in three years. Donald expects the debt-service ratio to continue moving higher over the coming quarters.

“The world spends a lot of time talking about the level of Canadian debt being extremely elevated, but what matters most is not the level of debt that Canadians hold, but the cost of carrying that debt,” the Manulife economist said. “Canadians are going to start to feel the pinch.”

Cracks Appearing

There are already signs of strain. The roll rate — the percentage of credit card users who “roll” from early stage delinquencies to 60-89 day delinquencies — reached the highest since 2008 for one credit card program, while delinquencies for another were above the 10-year average, according to Royal Bank of Canada credit analyst Vivek Selot.

While the level of mortgage arrears is still low by historical standards, a rising debt service ratio could signal that’s about to change.

Retail Sales

Canada’s economy led the Group of Seven in growth last year, mostly because of the willingness of the country’s consumers to spend money. But growth is expected to slow this year. Gross domestic product unexpectedly shrank in January. Data for February is due Tuesday.

The nation’s retailers have already had a tough few months. Retail sales in February were still 1.8 percent below 2017 peak levels. In volume terms, the input used to calculate gross domestic product data, first-quarter retail sales probably posted the biggest quarterly drop since the 2008-09 recession.

The low unemployment rate and decent economic growth will help the economy withstand higher rates, though risks are increasing.

“You have some capacity in the economy to absorb this, but the fact that rates are going up isn’t positive for consumers, because it’s making credit more expensive,” Bloomberg Intelligence analyst Paul Gulberg said Friday by phone. “That’s the but.”

Canada’s mortgage growth has fallen to the lowest in nearly two decades as interest rates rise and after new mortgage rules took effect at the start of the year.

Total residential mortgage credit grew just 0.3 percent on average over the last three months, the slowest since 2001, Bank of Canada data show. That’s down from 0.47 percent at the end of 2017, and about half the average 0.57 percent pace over the past twenty years. Outstanding residential mortgage loans in Canada now total C$1.53 trillion ($1.19 trillion), the data show.

Borrowing costs are rising for the first time in almost a decade, and recent rule changes are making it tougher to get a mortgage. Just how sensitive consumers — and the economy — will be to higher rates has become a key question for policy makers, with Canadians now holding a record C$1.70 in debt for every dollar of disposable income.

Dominique Lapointe, an economist at the University of Ottawa’s Institute of Fiscal Studies and Democracy sees slowing credit growth as a potential headwind for Canada’s economy, at least in the short run. “In the near term, it’s bad for growth. In the longer-run, when it leads to deleveraging, it’s good for financial stability. What matters is the speed of deceleration, or contraction, in credit,” Lapointe said in an email.

Bank of Canada governor Stephen Poloz will be speaking later this afternoon on the subject of household indebtedness.

Canada’s housing market remains a large risk for the seventh consecutive quarter according to the latest report from the CMHC.

Its Housing Market Assessment for the three months to the end of March 2018 highlights evidence of overvaluation and price acceleration, especially in Toronto, Vancouver, Victoria, and Hamilton.

“Our market assessment continues to show a high degree of vulnerability at the overall national level due to moderate levels of price acceleration and overvaluation existing together” warns chief economist Bob Duggan. “Regionally, there’s a fair amount of variation, as we continue to see a high degree of vulnerability in major centres in Ontario and British Columbia while Prairie and Atlantic markets range from moderate to low.”

Vancouver has seen overall affordability weaken amid rising prices in the sub-$1m market, coupled with increasing mortgage costs. CMHC says the city’s housing market is highly vulnerable.

Victoria has little evidence of overbuilding despite an upward trend of completed and unsold units. Prices are higher than local incomes in many cases though, providing strong evidence of overvaluation.

Montreal has low vulnerability although CMHC says price growth is picking up.

Calgary, Edmonton, Saskatoon and Regina are all showing signs of overbuilding, with high levels of new and unsold homes and high rental vacancy rates.

Winnipeg and Atlantic Canada show low vulnerability.

“We continue to see a high degree of vulnerability in the Hamilton housing market due to price acceleration and overvaluation. It’s important to note, however, that overvaluation is easing as house prices are moving further into line disposable incomes, population growth and employment,” commented Anthony Passarelli, Senior Analyst, Hamilton.