Economists Wary of Canadian Housing Markets: What this means for Homeowners

Canadian housing markets image 434222
Image: courtesy of the National Parks Service

Multiple economists are looking warily towards Canada’s housing market this spring, where a decade of market boom and inflated costs is ebbing in what some experts to believe to be a risk level on par with those of the financial crisis ten years ago.

In a report released in April the International Monetary Fund released the Global Financial Stability Report, a comprehensive diagnostic on the economic status both in the United States and worldwide. The study found that American and Canadian housing markets have exchanged places from ten years ago; while the United States market seems to have evened out, with lower household debt and home prices better aligned with income levels, the Canadian market seems to have done the opposite. Costs in Vancouver have more than doubled in the past ten years, and the IMF reported that valuations in popular cities such as Hamilton, Toronto, and Vancouver are over-inflated.

The report stated that due to a heavy increase in foreign investment, many housing markets worldwide are becoming less stable. While long term investment strategies can be stabilizing for an economy—such as apartment building or multinational construction firms— purchase of individual homes can be detrimental to the housing market, especially when done to maintain an active portfolio strategy. According to the IMF report, money from foreigners buying individual homes, “seem(s) to be associated with higher house prices in the short term and more downside risks to house prices in the medium term in advanced economies.”

Provincial governments have been trying to combat the increasingly pressing issue, introducing foreign buyers’ taxes in an attempt to reduce instances of overvaluation. Another strategy recommended by report was to implement government regulations which would minimize the risk put upon home buyers. Canada’s bank regulator did just that when it introduced a mortgage stress test, which requires borrowers to qualify for a mortgage rate two percent higher than the one they are being offered by the bank. The regulation essentially reduced the maximum amount home buyers are allowed to borrow by around twenty percent.

This stress test has become quite frustrating for the Canadian residential real estate industry, with multiple industry groups stating that it’s shutting out many buyers from the markets. The test is still in place, however, and in its March budget plan the Canadian federal government instead honed in on a new “First Time Home Buyers Incentive” program. Planned to roll out this fall, the incentive will subsidize first home purchased up to ten percent after qualifying for down payments. Mortgages will be lower than they otherwise would be, and the amount paid by the Canada Mortgage and Housing Corporation won’t have to be paid back until the sale of the home.

So what does all of this mean for home sellers? For those planning to sell their home, many put in months adapting and renovating their homes in order to prepare them to sell, and the last thing they want to consider is not putting their house on the market. Fortunately, although economists are wary of housing trends, projections for the year still maintain that demand will increase. During a period of market instability. Some economists believe the market will lull as new home buyers wait for the Incentive program to kick in, but general projections have overall markets either stagnating or continuing to rise.