Ask anyone why Canada’s real estate market remains sluggish, and they will instinctively point to the much-maligned mortgage stress test. But a report issued by the Bank of Canada (BoC) paints a very different picture of what happened in the overheated real estate markets in the GTA and Vancouver.
The report never uses the word “bubble,” preferring the more neutral-sounding term “froth,” and points to excessive enthusiasm led to runaway house price growth, followed by the inevitable snap-back once there weren’t enough buyers to keep the party going.
In other words, people panicked. Expecting house prices to keep growing rapidly, they jumped into the market as soon as they could, and so further pushed up prices and home sales.
Then new taxes and mortgage rules took hold.
The real estate board press release this week announced another decline in home sales, and groups like Mortgage Professionals Canada have repeatedly warned that the rule risks shutting an entire generation out of home ownership.
They’re calling on the government to remove or loosen the test, which requires borrowers to qualify at an interest rate two percentage points higher than the one they’re being offered.
While the mortgage stress test did play a role, it was a minor one, the BoC concluded.
A lot of things happened in 2016 and 2017 to slow down what was at the time an overheated housing market. British Columbia and Ontario introduced foreign buyers’ taxes. Canada’s banking regulator, OSFI, progressively toughened mortgage lending rules. And the Bank of Canada began raising interest rates.
For real estate prices to rise again, it is a matter of affordability. A recent study from Zoocasa highlighted how extreme the problem has become. It estimates only the top 2.5 per cent of Vancouver’s earners, and the top 10 per cent of Toronto’s earners, could afford a detached home today. Only the top 25 per cent of earners in these cities can even afford a condo.
So, in the end the blame falls on buyers who threw caution and common sense to the wind and bought homes at vastly inflated prices and sellers who cashed in on the frenzy in an era of bidding wars. -CINEWS