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TechnologyHere's What The Bank Of Canada Says Is The Real Reason For The Housing Slowdown

22:50  27 april  2019
22:50  27 april  2019 Source:   huffingtonpost.ca

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Bank of Canada governor Stephen Poloz, right, listens to senior deputy governor Carolyn Wilkins during a news conference in Ottawa on July 13, 2016. MONTREAL — For months now, the real estate industry has been telling us that Canada ' s mortgage stress test is the primary cause of the housing

Canada ' s housing market may be finally showing signs of cooling. According to Canadian Real Estate Association statistics, average Change is attributed in part to the Bank of Canada raising interest rates for the first time in years, as well as provincial legislation in Ontario and B.C. aimed at slowing

Here's What The Bank Of Canada Says Is The Real Reason For The Housing Slowdown© Provided by Oath Inc. Bank of Canada governor Stephen Poloz (right) listens to senior deputy governor Carolyn Wilkins during a news conference in Ottawa, July 13, 2016.

MONTREAL For months now, the real estate industry has been telling us that Canada's mortgage stress test is the primary cause of the housing slowdown in Greater Toronto and Greater Vancouver.

The test is never far from the top of any real estate board press release announcing another decline in home sales, and groups like Mortgage Professionals Canada have warned that the rule risks shutting an entire generation out of home ownership.

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The central bank says growth in Canada during the first half of 2019 is expected to be slower than previously anticipated. The Bank of Canada “projects real GDP growth of 1.2 per cent in 2019 “All combined, the global slowdown and specific factors weighing down on Canadians households and

The Bank of Canada maintained its target overnight interest rate at 1.75 per cent Wednesday, as widely expected by analysts. Yet Governor Stephen Poloz said Canada has "not been immune" to the effects of a global economic slowdown . In his opening statement during a meeting with members of

They're calling on the government to remove or loosen the test, which requires borrowers to qualify at an interest rate two percentage points higher than the one they're being offered.

But a report issued by the Bank of Canada paints a very different picture of what happened in the overheated real estate markets around Toronto and Vancouver over the past several years.

The report never uses the word "bubble," preferring the more neutral-sounding term "froth," but it paints a clear picture of housing markets where excessive enthusiasm led to runaway house price growth, followed by the inevitable snap-back once there weren't enough buyers to keep the party going.

And while the mortgage stress test did play a role, it was a minor one, the Bank concluded.

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The Bank of Canada says the economic slowdown that began at the end of last year is a bit worse than it was expecting, including a sharper-than-anticipated slowdown in Canada ' s oil patch. The bank also singled out softness in the housing market and consumer spending as reasons for a gloomier

Another reason behind the affordable housing problem in Canada is the recent real estate boom. And while this is great for the Canadian tourist industry, for those families who have lived in these places for years, the financial burden is only getting worse.

A lot of things happened in 2016 and 2017 to slow down what was at the time an overheated housing market: British Columbia and Ontario introduced foreign buyers' taxes; Canada's banking regulator, OSFI, progressively toughened mortgage lending rules; and the Bank of Canada began raising interest rates.

To get an idea of just which of these changes actually affected housing, and how, the Bank's analysts analyzed "loan-level micro data to decompose movements in housing resales." In other words, they attempted to track the actual flow of money through mortgage markets, to see how each change successively affected people's decisions.

Earlier on HuffPost Canada:

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What they found was a housing market where prices grew way out of affordability range for buyers. Between 2015 and 2018, the rising cost of home ownership would have lowered annual home sales nationwide by a hefty 56,000, the Bank's report estimated.

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That was another way of saying that Vancouver and Toronto are not the Bank of Canada ’ s problems. It is important to be clear about what the central bank The Bank of Canada rates the probability of a financial crisis caused by sharp correction in housing prices as low. The likelihood that something

The Bank of Canada says that Foreclosures could end up being double what they were in 2008/09. Keep in mind our foreclosure rate was small in comparison to

Only a fraction of that 10,000 sales would have been due to the mortgage stress test, the Bank found. All the rest would have been due to rising prices and hikes to mortgage rates.

But Canada got lucky: The affordability crisis happened about the same time as a jobs boom, which pushed up incomes and increased demand for housing by almost enough to offset the jump in home ownership costs. Hence, a housing slowdown, but no bust.

The Bank flagged another classic sign of a housing bubble: Around 2015 and 2016, Toronto and Vancouver saw a spike in home sales, well beyond what you would expect at that level of employment and income. The increase in sales in that time was 10 times as large as it should have been, given economic conditions, the Bank estimated.

Here's What The Bank Of Canada Says Is The Real Reason For The Housing Slowdown© Provided by Oath Inc. The Bank of Canada's research shows that home sales, led primarily by Toronto and Vancouver, were excessively high during the 2015-2016 period, and now have fallen to levels below where they should be.

"Much of the previous strength in resale activity was influenced by extrapolative expectations. ... These expectations quickly faded following the policy measures," the report stated.

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In other words, people panicked. Expecting house prices to keep growing rapidly, they jumped into the market as soon as they could, and so further pushed up prices and home sales.

Then, when new taxes and mortgage rules took hold, expectations went from too optimistic to too pessimistic. Sales fell below where they should be, given economic fundamentals, and that's where they remain today.

Much as we'd like to blame foreign buyers or government policy, it seems we kind of did this to ourselves.

And a rapid rebound seems unlikely. The Bank's report suggests sales will likely remain sluggish until prices align better with incomes.

But so far, affordability isn't improving, or at least not much. Prices remain elevated even as sales remain weak, and a recent study from Zoocasa highlighted how extreme the problem has become: It estimates only the top 2.5 per cent of Vancouver's earners, and the top 10 per cent of Toronto's earners, could afford a detached home today. Only the top 25 per cent of earners in these cities can even afford a condo.

And, with household debt hitting yet another record high at the end of 2018, Bank deputy governor Carolyn Wilkins expects consumers to keep hitting the brakes on spending.

Here's What The Bank Of Canada Says Is The Real Reason For The Housing Slowdown© Provided by Oath Inc. Bank of Canada senior deputy governor Carolyn Wilkins at a news conference in Ottawa, Wed. Jan. 17, 2018.

"When consumers are highly indebted and yes, it's a major vulnerability, it's the number one financial vulnerability for the Canadian economy at some point households may start to say, 'I need to increase my savings'," Wilkins told reporters at a press conference on Wednesday.

What that means for the housing market going forward is hard to guess, and even the Bank of Canada isn't willing to go out on a limb. With new taxes and new mortgage rules working their way through the system, and high debt levels supported by a booming job market, we've got a brew on our hands no one has ever quite seen before.

The Bank's report sums it up neatly, if not reassuringly: "The housing market is currently in uncharted territory."

This article originally appeared on HuffPost Canada.
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