After a sharp pullback in sales and average prices over the past 6 months, realtors were predicting a back-to-school buyer surge in September. That didn’t happen. In the Greater Toronto Area, September’s sale volumes fell 38 to 45% over August, depending on home and location, according to Zoocasa’s data. Vancouver home sales also fell 7.3% from August through September.
Meanwhile a recent UBS study, named Toronto the most dangerously inflated housing market in the world today, with Vancouver also making the top 5. See: Toronto tops global list of real estate bubble risks. Notably, as real prices have doubled in 13 years, real rents have increased by only 5% and real income by less than 10%.
In July, justified concern about highly indebted Canadian households and historic lows in interest rates, prompted the Canadian Office of the Superintendent of Financial Institutions to propose that all buyers needing a mortgage (not just those with less than 20% down) qualify based on a rate 2% higher than being offered, ie., if the lender is offering a rate of 2.85%, the borrower has to qualify for the loan based on a 4.85% rate, similar to the test now used for CMHC insured borrowers. This would reduce purchasing power by about 18% based on current interest rates. If passed, the new rule would take effect in the New Year.
Bottom line: stress-testing to make borrowers qualify at higher interest rates is necessary for longer term stability. Short-term though, its likely to accelerate the mean reversion already underway in Canadian realty markets and Canadian economic growth. See: Why the worst may be yet to come in Canadian housing, and here is a direct video link.
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