Canada’s housing market: Is it really all that bad?

Higher interest rates and tighter mortgage rules have been feeding their way into the housing market and will continue to do so for a while. This has inevitably taken the steam off things and is arguably one of the main reasons the Bank of Canada (BoC) is happy to prolong its pause.

1. Homeowners are watching the value of, typically, their largest asset plateau – or even drop. It's also possible that some homeowners would like to sell their homes if they're at the risk of entering negative equity territory.
2. Mortgage repayment costs are creeping up as interest rates edge higher, and the fact that a lot of Canadian households are running high levels of debt isn't great news.
3. Nevertheless, it isn’t an easy selling environment. Not only is it harder for prospective buyers to get a mortgage, but finding affordable homes is still an issue.

These factors don’t bode well for housing demand.

Canada’s real estate association (CREA) recently reported home sales sunk 9.1% month on month in February and hit the lowest level since November 2012. Although the colder climate might have suppressed the figure, it's unclear if the broad-based slowdown is solely a weather story.

Canada’s new mortgage regulations were introduced in January 2018. In short, the new rules have made it tougher for those with ‘fragile finances’ to obtain a mortgage and (as a secondary effect) prompted a slowdown in the housing market.

The 2014 oil price shock took a lot of momentum out of Alberta’s housing market and, coupled with the below-par trajectory for the energy sector; you can argue the implementation of a stress test will only make matters worse. Data collected last year confirmed this, where provincial sales reached the lowest level since 2010.

GDP growth in January not only came as an upside surprise (+0.3% MoM) but also offered some upbeat news for real estate. As reported by Statistics Canada, the construction sector grew for the first time in eight months - with residential construction posting its second consecutive monthly gain. Now, although the sector tends to be quite volatile, as we wrote earlier in our GDP preview, the recovery in building permits provides us with some reassurance when it comes to investment in the housing market going forward.

Moreover, in the recently announced federal 2019 budget, first-time buyers were amongst the winners. The government has created an incentive for individuals to jump onto the property ladder by offering to absorb part of the associated costs, namely an $885 million investment over five years. However, this won’t come into effect until autumn.

As a result, home buyers might be tempted to delay their decisions, meaning, until then, our view on what’s happening in the market will be clouded. This reinforces our previous argument that - if the BoC opts to hike in 2019 - it wouldn’t arrive until the fourth quarter as the housing market is likely to appear weaker-than-expected in the near-term.