While real estate might be a product of local markets, probably the single biggest reason for the potential nation-wide real estate slowdown in 2017 are macroprudential measures introduced in late 2015 and throughout 2016 (and possibly stretching into this year, should banks be required to cover a portion of mortgage default losses).
What are macroprudential measures?
Macroprudential is a term used to describe financial policies that are aimed at minimizing or eliminating risks to the financial system as a whole — think of it like a blanket, nation-wide policy that’s used to eliminate or reduce systemic risk within our country’s economy.
In Canada, these macroprudential measures included the increase to minimum down payments required for home purchases over $500,000 and the requirement of all high loan-to-value borrowers (and those who chose amortizations over 25 years) to qualify based on posted mortgage rates, rather than discounted mortgage rates.
In the U.S. these measures included stricter underwriting standards for mortgages (implemented after the 2007/2008 credit crunch and housing crash), and increased margin and capital requirements for banks and lenders.
Impact of these measures
The impact of these measures, both in Canada and in the U.S., has been significant.
According to analysis by Genworth Canada, the largest private mortgage insurance provider, over a third of home buyers would not have qualified for a mortgage on their current home had they applied after the new mortgage rules were introduced in 2016. Additional analysis suggests that another 8 per cent to 10 per cent of current homeowners would be unable to absorb even a $200 increase in monthly expenses — the equivalent of a 0.75 per cent increase above currently low rates.
Then there’s the impact tighter mortgage regulations had on lending institutions in 2016. Higher capital requirements — this is the money banks and lenders must keep within their coffers in order to cover worst-case scenario losses — and the threat of having to shoulder the responsibility of defaulted loans has meant small, incremental increases in both fixed and variable mortgage rates. Not enough to establish rising rates, but just enough to knock out those buyers struggling the most to get into the real estate market.
And now rates are poised to rise in 2017.
Don’t discount Trumpflation
But attempts to keep our nation’s economy strong and stable aren’t the only factors that will impact Canada’s varied real estate markets in 2017. This year must also contend with the very real possibility of inflationary economic policy under the newly elected President Donald Trump.
Trump campaigned on a plan to stimulate the slowly-but-steadily-growing U.S. economy by spending big on infrastructure. This deficit-style spending still worries global financial markets (albeit with a lot less impact than when his presidency was first announced). Still any movement towards massive infrastructure spending and tax cuts will lead to inflationary pressures on the U.S. economy and this could mean additional rate increases by Federal Reserve Chair, Janet Yellen.
While Federal Finance Minister Bill Morneau and the Bank of Canada have stood their ground — committing to the 2 per cent inflation target, as opposed to following the U.S. Federal Reserve’s lead — it’s only a matter of time before the Canadian economy is forced to respond to U.S. economic pressures.
As a result, we could see additional increases in both fixed and variable rate mortgages in 2017 — and any rate hike will impact demand side of the real estate equation, and translate into further market slowdowns and eventual price cuts.
Then there are the foreign buyers
Finally, there’s the elephant in the room: Foreign buyers.
While the impact of foreign buyers is not uniform across the country, the hottest markets — Vancouver, Victoria, Toronto and Montreal — certainly benefitted from non-resident foreign money.
One of the biggest influencers, particularly on the west coast, has been the influx of Chinese money. In an effort to capture their new-found wealth, many Chinese home buyers sought out foreign jurisdictions to park their coin. The result was increased demand on residential and commercial real estate in sought after cities, such as Sydney, Australia and Vancouver, Canada.
A few national and provincial governments, including Canada, responded to this influx of foreign cash. In October 2016, the federal Liberals opted to close a loophole that helped foreign buyers, as well as real estate speculators. Starting in 2017, the sale of all real property must be reported on each person’s annual income tax returns. (This means any property sold in 2016 must be reported on the T1 General tax form for 2016, which is due in April 2017.) While the rules can get complex, the general gist is that anyone who has purchased and sold a property must report it; if the property doesn’t qualify for the principal residence exemption, the seller must pay capital gains tax. Now, in order to qualify for the principal residence tax exemption, the homeowner or the spouse of the homeowner must “ordinarily reside” in the property. Now, no one is foolish enough to assume that this will eliminate all the foreign buyers from the Canadian market, but those who want to avoid paying tax on the sale of the property that they do not live in, may end up looking elsewhere to park their money.
Then there was the B.C. foreign buyers’ tax — a 15 per cent surtax introduced in August 2016. “This tax only exacerbated a market slowdown that had just begun after six months of robust activity,” explains Adil Dinani, real estate agent with Royal LePage.
Yet, while it can’t be denied that B.C.’s new tax had a big part to play in slowing down sales activity in B.C.’s Lower Mainland markets, credit must also be given to the Chinese government.
Due to increasing pressure on the renminbi (China’s currency) Beijing took steps to stop money flowing out of the country. As a result, by mid-2016 Chinese banks started to apply stricter rules on international money transfers and one Chinese bank want as far as obtaining a B.C. court order to freeze the assets of a businessman that they accused of “fleeing China and buying ‘luxury’ Lower Mainland homes [using] a defaulted $10 million loan.” To put this in perspective, the court order was issued in June 2016 — the same month sales dramatically slowed in B.C.’s Lower Mainland.
Right now, many buyers, sellers and those who work in real estate are watching and waiting to see how the spring selling market unfolds. If there are no other regulation changes and if supply continues to be constrained, there will be little movement in prices in the hotter Canadian property markets. However, unless there are dramatic changes, most Canadian markets can expect a shift towards a more balanced real estate market — and this will mean a slight drop in prices for most markets.