The slow down in the Canadian housing market seen late in 2017 is likely to get worse before it improves according to RBC Economics.

In his latest housing report senior economist Robert Hogue says that the market is likely to soften further as the pool of buyers who were pre-approved for a mortgage under the old rules runs out.

He notes there could be a “bumpy ride” ahead in the coming months as the spring buying season kicks in following the traditionally slow start to the year.

However, Hogue’s outlook is for interest rates and affordability to maintain downward pressure on the Canadian resale housing market with price increases set to be restrained “substantially.”

The outlook calls for resales of 500,300 units in 2018 (down from 514,400 in 2017) and for price rises to slow from 11.1% in 2017 to just 2.3% nationwide in 2018.

For January, the national home price index gained 7.7% year-over-year, slowing from the 9.2% annual rise in December.

Resales were down sharply in Toronto (-26.6%) and Vancouver (-10.5%) but less evident in Montreal (-4%).

Still reeling from the oil and gas sector’s plummet, Calgary has shown signs of recovery, however, that’s now in jeopardy.

Calgary’s real estate market is flat with an overabundance of condos still listed and buyers having trouble securing mortgages. Croft Axsen, owner of DLC Jencor Mortgage Corporation, says refinances, in particular, have become difficult to obtain.

“The market here is flat and quiet,” he said. “Refinances are difficult because of the flat prices and the government regulations have restricted activities so much; purchases are flat because of the economy. We don’t have the migration that Toronto and Vancouver do, so sales have been flat for the last little while.”

Axsen’s analysis is in line with what many brokers have told Mortgagebrokernews.ca: B-20, intended as a panacea for overheating in Toronto and Vancouver, has been a paroxysm everywhere else in the country.

“Refinances are not insurable, so all of the monolines are out of that market and there’s less competition because of government interference in the marketplace,” said Axsen. “It’s a significantly smaller market than it used to be, which I assume is the government’s purpose, but I’m not sure restricting liquidity in Calgary is necessary at this time, but I understand their concerns about Vancouver and Toronto. Unfortunately, they want to use a sledgehammer instead of a needlepoint to fix what they’re concerned about.”

He has noticed an uptick in people forced to sell their homes because of an inability to get refinanced, as well as ‘move-up’ buyers with children on the way being stuck in their insufficiently-sized condos.

“For many of them they don’t understand, because they’ve been able to get mortgages their entire lives, but now they’re being told they can’t.”

Julie Jeffery, a broker with DLC Elevation Mortgage, says realtor and consumer confidence is low.

“They’re really, really nervous,” she said. “When people get nervous, they shut down and don’t move ahead with their decisions to buy houses.”

Gone are the days when seemingly everybody bought a new home every three to five years. Now move-up buyers are stuck in their condos, and with condos planned before the economy crashed coming to market, there’s too much supply.

“They list to sell, but are unable to sell,” said Jeffery. “It’s really sort of squashing that market where those condo buyers would be moving up into a townhouse or single-family home, so there are not a lot of sales in the condo market.”

Although sales have hit a nadir, demand for brokers’ expertise is up. While it might provide fleeting comfort, the industry doesn’t appear imperiled—at least for the time being.

“We’re experts in the world of mortgages,” said Jeffery. “As much as there’s been a lot of concern, and as much as I don’t want to see more regulation, the positive I see is that more and more clients are saying, ‘My realtor said you’re an expert and you can help me get a mortgage.’ That at least makes me happy for our industry.”

Five weeks into the latest B-20 regime is all it’s taken for brokers to sound off.

Homebuyers are having trouble qualifying for mortgages, as was predicted, and many are securing loans from the private channel. According to Ron Butler of Butler Mortgages, in the name of cooling down two overheated markets, the government has callously acted against the interests of consumers.

“If you live in Medicine Hat and want to finish your basement by refinancing, why should you be afflicted because of something that’s about two big cities in Canada,” Butler said of Toronto and Vancouver. “If your qualification test forces them out of A lending and into B lending, you’ve totally screwed the consumer, and why should that be government policy?

“Why a federal government creates a countrywide regulation when there are only two major metropolitan areas that are important to this formula—why is it that somebody who’s just making an average living in Winnipeg is going to have to be affected by it at all? Something tells me the government doesn’t know what it’s doing. It’s not being careful enough making sure consumers in their everyday lives are not affected by this.”

Passing a 200 basis point stress test is no easy feat, but combined with rising interest rates and foreign ownership that shows no sign of abating—and which augments price points—Canadians could have even more difficulty attaining homeownership.

Alluding to the 15% foreign buyer tax, Butler says it did the trick and, in tandem with other measures, helped bring the cost of housing down.

“In both of the provinces where the provincial governments introduced stiff controls on foreign investments in properties, activity and pricing dropped,” said Butler. “Prices are down in Toronto from April of last year. They’re all down – some slightly and some a bunch. So with prices down anyway, hasn’t the crisis been averted? Yet we continue to add more and more regulations.”

Just how much are borrowers being squeezed?

Krista Lawless, broker and co-owner of Lawless Brown Mortgage Team of VERICO Mortgage Depot, says a lot—especially with the interest rate hike a few weeks ago.

“The new stress test has made brokering more difficult all around,” she said. “The rate hikes are now making it that much more expensive for our borrowers. Those who need to access equity in their property have no choice but to pay the higher rates. With every increase in the qualifying rate, it decreases the loan amount for our borrowers, which can make it a challenge, depending on what their goals are.”

Lawless also called January’s B-20 update “premature” because no time was accorded to the other regulatory measures.

“With rates already on the rise and the Toronto and Vancouver markets adjusting to the foreign buyer tax, I feel they should have waited an appropriate amount of time to see the full impact of those changes in the housing market and then evaluated to see if any further changes were needed,” she said. “The rules implemented have affected everyone coast-to-coast. Borrowers are more limited in their choices and will be forced to seek private financing elsewhere—at a much higher cost—if they do not meet the new government regulations.”

While the Bank of Canada’s latest increase in its overnight interest rate is a move marked with characteristic caution, a combination of existing factors means that the hike will still make significant waves in the nation’s economic engine, according to Dr. Sherry Cooper of the Dominion Lending Centres.

The BoC’s decision to increase the rate to 1.25%, which marked the third hike since July 2017, pushed the figure to its highest level since the global financial crisis, Cooper said.

“The move comes in the wake of unexpected labour market tightening and strong business confidence and investment. The Canadian economy is bumping up against capacity constraints as the jobless rate has fallen to its lowest level in more than 40 years,” Cooper explained in her latest posting.

Read more: Rate-hike cycle already the most severe in two decades

“Inflation is just shy of the 2.0% target level and wage rates are rising, albeit at a relatively moderate pace,” she added. “Exports have been weaker than expected. NAFTA uncertainty is ‘weighing increasingly’ on Canada’s economic outlook as cross-border shifts in auto production are already beginning.”

Cooper cautioned that consumption and housing will slow as a result of the combination of higher interest rates and new mortgage guidelines.

“Growth of household credit has slowed somewhat since the first half of 2017, even though some households may have pulled forward borrowing in anticipation of the new B-20 guidelines related to mortgage underwriting from the Office of the Superintendent of Financial Institutions (OSFI). This slowing is consistent with higher borrowing costs due to the two policy rate increases in 2017,” Cooper quoted last week’s Monetary Policy Report (MPR) as saying.

Cooper warned that with higher interest rates, the costs of debt servicing will rise, which in turn will put a damper on consumption growth, “particularly of durable goods, which have been a significant driver of spending in recent quarters.”

“Elevated levels of household debt are likely to amplify the impact of higher interest rates on consumption, since increased debt-service costs are more likely to constrain some borrowers, forcing them to moderate their expenditures,” the MPR went on to say.

 James Loewen believes the government has catalyzed the very thing it is trying to prevent with the recent B-20 changes, and the irony isn’t lost on him.

Loewen says that most borrowers will be stuck in the private channel, and will have to walk away from their homes. The resulting supply surge in tandem with diminished demand—the result of a reduction in buying power, estimated to be around 20%—will bring the housing market crashing down.

“It’s ironic because the government purports that they’re trying to prevent an economic crash, people walking away from their houses, but if you can’t qualify under these guidelines, which, definitively more people can’t, there will be more people walking away and selling their house,” said Loewen, broker and owner of Loewen Group Mortgages.

He added that B lenders got hit particularly hard because borrowers now have to qualify 2% above the prime rate. However, most won’t and will be forced into the private channel—a traditionally temporal solution that could have no end in sight for many borrowers.

“They will be inciting the very thing they’re trying to avoid, which is a collapse,” said Loewen. “If I couldn’t qualify at TD or Scotia, I’d go to Home Trust or Equitable for a slightly higher rate than the best rate, but now I probably won’t qualify for that mortgage, so I‘ll have to go private. The risk private lenders are taking is much lower than even six months ago, and we can’t bundle up to 85% loan-to-value inside these government guidelines, so there might not be a solution at all for the client and they might be forced to sell.”

Regarding increased regulation, Loewen doesn’t think that the industry will be subjected to any more in 2018—but, he added, that could change depending on Q1 real estate numbers. For that reason, he hasn’t ruled out an interest rate hike, either.

“The next logical step is for the government to impose or impede on private lending, but they’ve already indirectly affected private lending guidelines,” said Loewen. “The B market lit up over the last two or three years, but that’s hard now, so the private market is lighting up. There is more demand for private lending but there will come a period of time when people realize they can’t afford private money anymore.”

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.”