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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