October 5, 2018

What is the Mortgage Stress Test and How Is It Impacting the Canadian Real Estate Market?

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What is the Mortgage Stress Test and How Is It Impacting the Canadian Real Estate Market?

Posted by: Scott Reid, Account Manager

This overview provided courtesy of the Canadian Real Estate Association (CREA) and Coldwell Banker Affiliates of Canada.

When the Canadian of Federal Government announced the new “Mortgage Stress Test” in October 2017, it was expected that many homebuyers would expedite their purchases during the two-and-a-half-month window before it took effect on January 1, 2018. The response to the new policy was stronger than expected. In December 2017, seasonally adjusted national home sales surged to the highest on record before dropping sharply in early 2018. The “Stress Test” is a legal requirement for all lenders to assess whether prospective borrowers looking to buy a home are able to withstand an increase of at least 2% in the lending rate of the Bank of  Canada’s five-year benchmark rate, or their contractual rate set out in the mortgage. As expected, this stress-test has had an impact on the Canadian housing market.

Canadian home sales showed a minimal increase in volume of 0.9% between July and August 2018, increasing for the fourth consecutive month. According to statistics released by The Canadian Real Estate Association (CREA), sales activity is still below monthly levels going back to 2014. Highlights of CREA’s recent report include:

  • National home sales volume rose slightly by 0.9% from July 2018 to August 2018.
  • Actual (not seasonally adjusted) housing activity in August 2018 decreased 3.8% compared to August 2017.
  • The number of newly listed homes was unchanged from July 2018 to August 2018.
  • The MLS® Home Price Index (HPI) was up 2.5% year-over-year (y-o-y) in August.
  • The national average sale price edged up 1% y-o-y in August.
  • About 2/3 of local markets were in balance territory in August
  • There were 5.2 months of inventory, in line with the long-term average

Looking Ahead at the Canadian Real Estate Market

The Canadian Real Estate Association (CREA) has updated its MLS® sales forecast of Canadian real estate Boards and Associations in 2018 and 2019.

National 2018 Forecast

  • National sales activity is expected to hit a five-year low in 2018. Expected volume of sales are forecast to decline by almost 10% to 462,900 units in 2018 compared to 2017
  • The national average price is expected to ease down 2.8% to $494,900 this year from 2017
  • The decline reflects fewer sales transactions in Canada's most expensive and active provinces, BC and Ontario

National 2019 Forecast 

  • Sales activity is forecast to increase modestly by 2.1% next year, to 472,000 units
  • This activity remains below annual levels recorded in 2014 - 2017
  • The national average price is forecast to rebound by 2.7% to $508,400 in 2019
  • The forecast average price increase in the province of Ontario (3.3%) is larger than any other province 

What Does This Mean to Relocating Employees

Economic conditions are favorable for housing demands in many areas of Canada. However, the 'stress-test' regulations put in place at the beginning of the year are impacting homebuyers’ access to mortgage financing in many housing markets. In addition, expected interest rate increases this year and into 2019 will continue to keep home sale activity in check.

As always, it is important to remember that market conditions vary greatly by housing price, region, city, and neighborhood.

Additional Information on Trends in Canada

Download Cartus’ Canada Relocation Policy & Practices survey for key trends in Canadian relocation, including flexible policy approaches, support for homeowners, temporary and rotational assignments, and more.

Please feel free to email me at trustedguidance@cartus.com with any questions on the Canadian market and how the survey findings apply to your program.

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