Canada

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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16 Comments

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  • Jesse 7 months 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 7 months ago

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

  • Peizhi 7 months 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?

  • Mtl_matt 7 months ago

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

    • SUMSKILLZ 7 months 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 7 months 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.

  • Cto 7 months ago

    MM
    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 7 months 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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