New government policies are leading consumers to have a more negative outlook when it comes to housing and real estate in Canada, according to Mortgage Professionals Canada’s recently released Report on the Housing and Mortgage Market in Canada.
While many consumers still agree that real estate remains a solid investment, consumer sentiment has become weakened by rising interest rates and new rules that are making it harder for potential home buyers to secure a mortgage.
“We are still seeing a high level of desire in home buying, especially among young people aged 25 to 34,” said Paul Taylor, president and CEO of Mortgage Professionals Canada, in a press release. “Whether they will be able to make that purchase may be an entirely different matter.”
The report indicates that although some fortunate first-time home buyers may be able to supplement their down payments with help from their parents, they are leaving a lot of middle-class Canadians behind. More young people are adjusting to the idea that they may never own a home and instead choose to become permanent renters. With more concern being placed on income and wealth inequality, current policies that create a permanent generation of middle-class renters could increase wealth inequality as the ability to own homes and generate long-term equity becomes more difficult, finds the report.
“We support a stress test, albeit at a reduced rate of 0.75 per cent, as it is a useful tool to test a borrower’s ability make future payments,” said Taylor. “However, the cumulative impact of rising rates, a two per cent or greater stress test, provincial government rules in Ontario and British Columbia and further lending restrictions are negatively suppressing housing activity, not just in Toronto and Vancouver, but throughout the country.”
The report also notes that policies which cause home prices to fall will reduce a home’s value, which will in turn hinder consumer confidence. According to the report, one of the most dangerous things that can happen within the Canadian economy is falling home prices.
“While we would normally expect falling prices to generate an increase in demand in the housing market, we have seen historically that this can actually reduce demand,” said Will Dunning, chief economist for Mortgage Professionals Canada, and author of the report. “Significant price drops put into question the reliability of the market as a whole, causing prospective buyers to fear that values will fall further.”
The report also says that although the market is acting as it should in response to actual economic conditions, home buying trends have been disrupted by stress tests. There is now an imbalance between supply and demand in nearly every region of the country. In Toronto and Vancouver, for example, the weakened housing market has been seen as a welcome change, though elsewhere in Canada it has been more unstable, where conditions were already soft, and price stability is being replaced by price erosion.
“The effects of these policies are especially concerning in areas that are already dealing with economic instability, notably Alberta, Saskatchewan and Newfoundland and Labrador, which are struggling to recover from the oil price shock,” added Dunning. “The worsening divide between housing supply and housing demand is further degrading the confidence consumers have in the economy and in housing.”