Mortgage Blog

Stress tests, foreign buyers and higher rates likely to impact housing market in 2018

January 2, 2018 | Posted by: Aaron Baxandall

New OSFI regulations and a requirement for more open data have changed the rules
By Pete Evans, CBC News Posted: Jan 02, 2018 5:00 AM ET

Real estate was a major topic in the business world in 2017, and with some big changes on the
horizon, the subject is likely to dominate headlines again this year.
Here are five things to watch in Canadian real estate.
Foreign buyers
Policy-makers in Toronto and Vancouver have taken steps to try to curb activity in a
perceived problem: foreign buyers gobbling up houses as investment vehicles, driving prices up
for everybody else.
Vancouver slapped a 15 per cent tax on foreign buyers in late 2016, and Toronto followed
suit in April of last year with a similar policy.
The impact on both markets was immediate, as sales and prices fell, although they have since
both rebounded.
Despite those moves, don't expect the issue to dissipate this year. Statistics Canada got money to
study foreign buyers in the last budget, and in December, the data agency published its most
authoritative numbers on non-resident investment in real estate.
• How other countries limit money from abroad
• ANALYSIS: Governments terrified of popping the bubble
Both cities still have less than five per cent foreign ownership, the numbers show, but market
watchers in both cities say that segment is growing, and the issue is worthy of more study before
any rash decisions.
'In places like Toronto and Vancouver,' CMHC's chief economist Bob Dugan told CBC in an
interview recently, 'there's been very strong growth in houses prices. So people became
concerned with trying to get that in check.'
Worries like that haven't dissipated since the taxes have come in, so expect more attention to the
topic this year.
Stress test rules
As of yesterday, new rules aimed at making sure borrowers can pay off their mortgages if rates
were to rise are in effect.
Last fall, the country's top banking regulator OSFI announced changes that will force lenders
to 'stress test' mortgage applicants, to make sure they aren't borrowing too much. Prospective
borrowers will now have their finances mocked up assuming mortgage rates are a full two
percentage points higher than they are now, or be stress tested at the five-year average rate
posted by the Bank of Canada — whichever is higher.
Anyone who fails the test can't get the loan they are applying for, which means they'll have to
either buy something less expensive with a smaller mortgage or sit out entirely.
• Bank regulator sees big risks in high debt
It's not just a concern for first-timers either, and it could lead to a surge in unregulated lending,
said Ratehub Inc. co-founder James Laird.
'Canadians who need to refinance and no longer qualify will be forced this way, while some who
are looking to purchase and no longer qualify with a regulated lender will choose to go this
way,' Laird said.
That's far from the universal view, however. While the OSFI rules are significant, economist
Doug Porter at the Bank of Montreal says he expects the market will largely be able to withstand
the impact of new stress tests, just as it has withstood other policy changes.
'Canada's housing market has defied the incessant talk of its imminent demise for years,' Porter
said in a recent report. Which is why this year, he expects the housing market to 'exceed
expectations, even with the new tighter OSFI rules, yet again crushing the bears' calls, if not their
spirits.'
Higher rates
The stress tests are based on the notion that interest rates are set to rise, and there's ample
evidence to suggest that's likely to come true.
After sitting on the sidelines for the better part of a decade, the Bank of Canada hiked its
benchmark interest rate twice last year.
Investors think there's better than 50 per cent chance of another increase as soon as this month,
and more could follow.
• ANALYSIS: Interest rates are going up — for real
Laird says he expects two rate hikes this year, and the bank is likely to pause for a brief spell
after the first one. The bank's rate is currently at one per cent, and while ratcheting it up to 1.5
per cent by the end of the year may not sound like much, that would make variable rate
mortgages more expensive than they've been in nine years.
As TD Bank economist Michael Dolega put it: 'Higher mortgages, amid continued Bank of
Canada interest rate hikes, will be a significant headwind on Canadian housing activity in 2018.'
More data on home sales
Another trend to watch is the outcome of a long dispute between Canada's largest association of
real estate brokers and a federal competition watchdog that has been fighting them for years to
make data on home sales easier for the public to access.
In early December, an appeals court upheld a previous decision ordering the Toronto Real
Estate Board to stop hoarding data on home sales. The Competition Bureau had argued that
keeping information about how much homes sold for, along with other information, forces
would-be sellers to work with a real estate broker to get it, which drives up costs to the benefit of
no one but the broker.
• Sold prices now online
The court ruling won't be the end of the fight: the board has up until the end of January to appeal
the decision all the way to the Supreme Court — something they're expected to do.
While the fight is localized to the Toronto market, TREB represents almost 50,000 brokers, so its
influence is substantial. As Toronto realtor John Pasalis told CBC News in a recent interview,
the TREB case 'will probably have ripple effects nationally. You'll probably start seeing this
with other boards as well.'
House prices
Ultimately, however, all these trends boil down to one fundamental question: will prices keep
going up?
Not surprisingly, opinions on the matter are a little divided. But there's a broad consensus that
the national housing market is on track to crank out more gains — even if they are smaller than
many owners have gotten used to.
Ratehub's Laird says he expects a flat market nationally. 'The macroeconomic factors that have
been driving price appreciation will persist in 2018,' Laird said, citing strong demand and a
growing economy. But higher interest rates and limits on foreign buyers, plus the stress test
rules, 'will act as an effective counter-balance, causing no net change.'
• ANALYSIS: 4 reasons house prices refuse to fall
TD's Dolega agrees, saying in a note to clients recently that 'we anticipate a continuation of the
soft-landing narrative that has so far characterized dynamics in Canada's housing market.'
After years of double-digit gains, 2018 is likely to be a bit more muted, Bank of Montreal
economist Robert Kavcic says, adding that rate hikes and the new OSFI rules 'should keep the
froth from returning.'

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