No back to school bounce back in Canadian housing

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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