IMF Warns Easing Canadian Real Estate Rules Like Stress Test Is “Ill Advised”

The IMF released its recommendations, after doing a deep dive into Canada’s economy. One key point was to not give into political pressure around real estate. Urging Canada to think long term, they advised against looser regulations or stimulus. The organization didn’t provide numbers, so we pulled a couple of data sets. Long-term, the impact from regulations appears to be very small, outside of volume. Household debt is still growing faster than incomes, and prices made minimal movements.

The IMF Warns Housing Stimulus Is “Ill Advised”

One key housing recommendation made by the IMF is Canada should think long-term. They note the government is under pressure to “ease macro prudential policy.” Further, there’s some pressure to introduce policies to “buttress housing activity.” It may give a small boost, but the organization says it is “ill-advised.” Debt levels remain high, and a slowdown in housing activity reduces vulnerabilities. Politicians arguing otherwise, claim recent measures reduce credit and home price growth.

The biggest measure put into place, and is being heavily lobbied against, is Guideline B-20 – a.k.a. the stress test. Stress testing is a quick test banks are required to do, to make sure borrowers can pay their bills at a higher rate. Since 2018 this is mandatory at banks, reducing the maximum households can borrow. Since most Canadians don’t max out their credit, it’s not that big of a deal to most of the country. However, it’s a key argument made by politicians, claiming over its over restriction. That’s may not be the case when it comes to marco debt levels and home prices.

Canadian Household Debt Is Growing Faster Than Income Still

The debt service ratio (DSR) continues to rise to new highs throughout Canada. The DSR is the ratio of disposable income households use to make debt payments. The total DSR reached 14.87% in Q4 2018, up 5.46% from stress testing was implemented. The mortgage DSR reached 6.69% in Q4 2018, up 3.56% from stress testing implemented a year before. If you’re a Toronto real estate agent, those numbers might seem small. If you’re an analyst or have a basic understanding of financial growth, that’s huuuuge growth.

Canadian Household Debt Service

The percentage of all disposable household income in Canada devoted to servicing debt. Debt continues to accumulate faster than income after implementation of B-20 Guideline.

Source: Statistics Canada, Better Dwelling.

The DSR ratios in Canada show even with stress testing, debt is growing faster than income. Total DSR is the highest level Canadians have had since Q4 2007. The mortgage DSR is the highest level since Q2 1992, at the end of the last bubble. Even with a stress test buffering households, household debt is still soaring.

Canadian Home Prices Have Seen Minimal Impact

The impact of stress testing has made a minimal impact on home price growth. The typical or “benchmark” home in Toronto reached $789,100 in April, up 6.35% since stress testing begun. Montreal’s benchmark home hit $360,900, an increase of 9.70% since stress testing started. Considering that’s just over a year since testing begun, it’s hard to argue is slowed price growth.

Canadian Real Estate Prices Post B-20 Guidelines

The price of a benchmark home in Canada’s largest real estate markets, post B-20 Guidelines.

Source: Canadian Real Estate Association, Better Dwelling.

Two markets where home prices dropped since testing begun are Vancouver and Calgary. Vancouver’s benchmark home fell to $1,008,400 in April, down 4.96% since stress testing started. Calgary saw its benchmark home fall to $411,100, down 3.81% from the beginning of the stress test. Fairly substantial drops, but not so large they aren’t explained by other measures.

Vancouver real estate prices are too high for local incomes, and Calgary is too low to be impacted. Vancouver has one of the highest income to home price ratios in the world. It requires 88% of the median income to service a mortgage on a median home today. To contrast, in Calgary, 75% of income earners could afford at least one segment of housing in the city. That’s individual incomes, not households. Further, Calgary prices have been falling since October 2014 – before unemployment spiked. Vancouver’s local income was too low to sustain home prices at that level. Calgary’s local income level is so high, a stress test has minimal impact.

Reducing regulations and providing stimulus is short sighted. So is calling current regulations overly restrictive. The stress test bomb dropped over a year ago, and debt levels continue to rise with minimal impact to prices. Most of the impact is in Toronto and Vancouver, where volume declines are the biggest issue. Reducing volumes seems like a bad thing for commissions today, but it’s great long term.

Reduced volumes today are one of the few ways to mitigate capital overhang without more debt. In plain english, the more people that delay their buy, the more people there are to catch the knife if it falls. The benefit is distressed property owners have liquidity. If all buyers are corralled into a smaller window, it means less friction if prices fall.

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  • Jesse 4 weeks ago

    Canada has been playing with funny money since the Great Recession. Debt increasing faster than income is expected, considering how monumental the pile has become. Even a small shift in rates is enough to inflate it and kill consumption.

    • Mac 4 weeks ago

      This is why Canada eliminated the $5 foot long in 2012. 😜

  • Peizhi 4 weeks ago

    If debt and prices are still rising, time to raise rates even more. They left them way too low for way too long. It sucks to have to rapidly hike them, but how about we don’t debase currency and pretend it’s economic growth? mmmkay?

    • MM 4 weeks ago

      I don’t mind to increase rate to any extent you want. With just one condition of cancelling rent control cap.

      • Smaug 4 weeks ago

        Two different things. Monetary policy is carried out by the central bank with a mandate to act independent of political interference. Rent control is carried out by provincial governments for the express purpose of political interference. There’s no coordination or conditionality from one to the other, nor will there be.

        • MM 4 weeks ago

          However, there is a perfect coordination in the mind of every bear. Such bear hopes to put entire burden on homeowners to take advantage from situation. And the only reason why he feels it is possible is because of rent control. Without rent control all burden would be placed onto tenants and their speeches would be much more rational.

          Speaking about real rules of the game, the entire first message is a nonsense, because household spending already caused inflation to be way below target. BOC has inflation-based behavior, not the behavior that OP wants.

          • Smaug 4 weeks ago

            Rent control became irrelevant in Alberta after their housing market tanked. Landlords had to slash rental rates in order to keep properties tenanted. If interest rates rise and housing markets tank elsewhere, the same pattern will happen in other cities. A 2% cap on rent increases means nothing when you’re cutting your rent by 20% to attract tenants.

          • MM 4 weeks ago

            Why would Toronto with massive lack of rental stock be same pattern as oversupplied Alberta?

  • Mtl_matt 4 weeks ago

    If anything the stress test is way too optimistic on the possible rates the borrowers could be paying in 10-15 years.

    • SUMSKILLZ 4 weeks ago

      I think mortgage originators should tell folks, if rates return to historic norms, this is what you’d have to pay monthly to keep your home, at renewal. Might be a cause for pause for enough people to be worth the effort.

      Building inspectors should also tell you ballpark costs for repairs over the life of your mortgage. Roofs, windows, doors, floors, plumbing, fencing, dang, it adds up to some crazy figures as the years go by. Its quite the horror show.

      • Brad 4 weeks ago

        I highly doubt that, people now don’t even take into consideration that holding an 800k house to term is going to cost them $1.5-1.8M and so their “double” is only nearly breaking them even, and paper gains evaporate quickly. Most people figure they can just kick the can down the road and spend spend spend.

        • MM 4 weeks ago

          You probably wanted to say that if a person borrows $800k today, over the term this person will pay off this amount, inflation adjusted. Very close to free money with just slight overhead.

          And of cause we believe that inflation is what BoC tells us.

  • MM 4 weeks ago

    Nobody really talks about the most relevant subject. About WHY IMF is opening mouth.
    Its not IMF’s business to start.
    Stress test is also not a common thing in developed countries, so IMF has not enough grounds to lobby anything.
    Lastly, stress test is just a TOOL. And somebody in foreign country tells to Canada not to use that tool for fine tuning the desired outcome, which is pretty mean.
    To read between lines, IMF’s words can be translated into “We want you to have low(er) rates and we deny your right to use other tools to influence market”.
    Not to mention that Poloz said two days ago same thing as IMF about B20.

    • Tobbit 4 weeks ago

      This is very True, the why is more important than the what. I think strings are being pulled from within Canada to provide external (IMF) pressure on the country. Those who are fighting to correct the past mistakes with policy are being heavily Lobbied from the otherside (Real Estate Boards, Banks, News Outlets etc) to drop rates/remove the stress test, remove taxes.

      • MM 4 weeks ago

        I wouldn’t include banks on that side of the battle. Entire B20 was literally designed by banks. They could introduce such action alone. but they wanted not to give competitive advantage to monoline lenders etc, so they made this rule almost country-wide.

        I would say pro-B20 team today is: CMHC, BOC, IMF, NDP, Banks
        Against B20: Real estate boards, PC, and surprisingly OSFI, who said B20 can be readjusted to new reality.

        The “money laundering cryers” and reports makers are in pro-B20 team as well.
        Liberals prefer other actions instead of easing B20, like HBP limits increases and shared equity programs.

        However, in October the jokers can be mixed and it would be irrelevant which team owns more heavy-weight players, if Scheer wins.

        • Tobbit 4 weeks ago

          Yes good point with the Big Banks! -Today- they’re very pro B20 and people have no choice but to renew with the same bank at a higher rate if they cannot find another lender.

          • MM 4 weeks ago

            Yeah, extra profit from inability to refinance. But also just before B20 was introduced, international rating agencies had been threatening Canadian banks with possibility of decreasing their ratings because of real estate risk. Therefore, banks did pretty much what was in their interests to avoid that undesirable outcome.

    • CanadaSucks 4 weeks ago

      I still believe a currency crisis for Canada is still something possible either this year or next year. In that case, BOC will need to raise rate. Even then raising rates might not work. To see how international investor react during a currency crisis watch what is happening in Turkey now. I am not sure why the IMF is taling about Canada now. Maybe they have data that suggest that Canada is about to experience a currency collapse. Just some of my thought

  • Cto 4 weeks ago

    Sounds like you’re under a little stress?
    Don’t worry about it …it’s all good!
    Remember, these are great bullish times. If the government wants to keep the stress test, rent controls, raise rates, what difference does it make to you. ???Your capital appreciation will beat all that… Seems strange that you should care. I thought you were going to reply with “Bring It On. makes no difference to me!!!!”

  • Rana 4 weeks ago

    Just increase every thing like salary of all govt employees govt benefit old age gis minimum wage hair cut bus fare groceries rents and interest rate too

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