It’s no secret that Canada’s real estate sector has not seen the growth over 2018 and the start of 2019 that it once saw. There are a number of factors that could possibly be contributing to the decline. We have curated the reasons that most sources speculate to be the cause below:
The “stress test”: In January 2018 new mortgage rules implemented by Canada’s top banking regulator – The Office of the Superintendent of Financial Institutions (OSFI) – came into effect. These rules included a requirement to “stress test” borrowers with uninsured loans to ensure they could withstand higher interest rates.
A majority of first-time borrowers have to purchase mortgage insurance, and were already obligated to undergo a stress test of their finances. The new rules impacted anyone who put down more than 20 per cent of the value of a home and didn’t have to pay such insurance, also known as an “uninsured” borrower.
The stress test ensured that borrowers would be able to pay the loan if interest rates become higher. They would be stress tested at either the five-year average posted rate, or two per cent higher than their actual mortgage rate — whichever is higher.
It seems that rising mortgage rates and tougher new mortgage rules have reduced the maximum buying price that homebuyers can afford. The OSFI stress test makes the process a bit more challenging, but it is not impossible.
Cold temperatures: Some analysts have said a there was a big drop in Calgary in February 2019 and speculate that the severe winter weather the city faced could have contributed to the reason. British Columbia and Alberta also saw more of a drop that the other provinces, where winters were more severe this year.
More people are choosing to rent: Economic conditions are promoting a growing number of Canadians to rent instead of buy. In Calgary then rental vacancy fell from 6.3 per cent in 2017 to 3.9 per cent in 2018. Especially in Alberta, where the unemployment rate remains relatively high, people are not thinking of buying homes. This is compounded by anxiety about provincial economies. Some studies also suggest generational differences, and that millennials prefer the travel lifestyle and are therefore more apt to rent than buy.
Rising interest rates: The Bank of Canada raised interest rates three times in 2018.
The Canada Mortgage and Housing Corporation (CMHC) has acknowledged that the stress test may have contributed to the slowing of demand, but it is hard to isolate it as the sole cause until more time passes.
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