Efforts to cool Canada’s housing market, such as higher interest rates and affordability restrictions, appear to be taking their toll – reports indicate that sector confidence is down among developers, consumers and real estate executives alike.
According to market analysis from RealNet Canada Inc., a regional and national housing market research firm, residential land investment has dropped 51 per cent from Q2 2012 in Toronto, 30 per cent in Vancouver and 52 per cent in Calgary, as developers pare down their land purchases in Canada’s largest markets. While these urban centres still seem to be choked with construction, such scenes are remnants of already closed projects on the way to completion.
An End To The Great Canadian Condo Boom?
Further data from Urbanation, a condo research company with a focus on the Toronto real estate landscape, point to normalizing conditions in the Big Smoke market, with 18 per cent fewer condos sold in Q2 2013 year over year. The decrease is on par with the available supply, and is actually closer to historical averages than the inflated numbers of recent years.
“The market is regaining its footing coming out of an extremely volatile sales environment during the past two years,” said Shaun Hildebrand, Urbanation’s senior vice president. “Developers have been cautious, but the success of some key projects this year and the solid performances of the resale and rental condo markets in the second quarter should improve confidence.”
Why Is The Market Slowing?
2013 has been a year of moderation for the Canadian housing market, following several seasons of sizzling growth and demand. In fact, conditions were getting so hot that fears arose that such demand was unsustainable, and that home values would inevitably bottom out. This was accompanied by rapidly rising levels of Canadian household debt, as lenders doled out mortgages at a furious pace. Amidst concerns that Canada was fast following in the footsteps of the U.S. housing market crash, the government stepped in with measures designed to calm things down before the market imploded.
These efforts included new affordability restrictions for high-risk buyers with the intent of dissuading some would-be buyers from taking on more debt than they can handle. The CMHC, Canada’s crown mortgage insurer, placed a 25-year cap on amortizations for this group, and implemented tougher debt ratio requirements as part of the approval process.
More recently, the CMHC has targeted lenders, capping the amount of securitized mortgage funds available to individual banks. This limits the amount of insured mortgages banks can grant high-ratio buyers (as required by law for this group), forcing them to take on more risk in order to provide mortgages to this group. Rather than add uncertainty to their balance sheets, by funding high risk mortgages themselves, banks are anticipated to respond with a rise to fixed mortgage rates to cover their costs.
Higher Rates Lead to Halting Buyers
It’s this higher mortgage rate reality that has led to a drop in market confidence among the housing market’s head honchos. The Real Estate Property Association (REALpac) and FPL Advisory Group released their latest Canadian Real Estate Sentiment Survey.
“Higher interest rates and higher volatility in the equity markets will likely make for more challenging times in the coming year. Perhaps this will lead to a greater separation in values between higher and lower quality assets. This range compressed significantly during the recent period of high liquidity in debt and equity markets,” said survey participant Allan S. Kimberley, Vice Chairman & Managing Director, CIBC World Markets.
Among the top concerns of respondents were:
- An interest rate rise is inevitable in the near future, and the effects will be widespread.
- -Higher interest rates will counter originally strong housing market demand, and asset values will remain flat as a result.
- Mortgages will be harder to acquire as debt capital and investor bond interest wane.