Toronto homebuyers should not expect the frantic pace and blistering prices of the housing market to continue, warns the head of the Bank of Canada.
“Prospective homebuyers and their lenders should not extrapolate recent real estate performance into the future when contemplating a transaction,” Stephen Poloz said Thursday with the release of the bank’s semi-annual financial system review.
It was a caution to consumers not to get caught up in the frenzied market conditions that see many GTA homebuyers bidding tens, sometimes hundreds of thousands of dollars, over list prices as demand continues to outstrip the supply of housing, particularly detached and semi-detached homes.
Poloz’s authority adds to a growing chorus of concern from banks and housing experts about the sustainability of the country’s two hottest housing markets in Toronto and Vancouver.
The caution came a day after Finance Minister Bill Morneau said Ottawa was conducting an in-depth examination of the country’s real estate markets to determine whether further safeguards are needed to ensure Canadians can still afford housing in the event of an interest rate rise or other economic changes.
There’s a growing risk of a sharp correction in Vancouver and Toronto, while many households are facing other financial stresses, including climbing debt, said the central bank’s report.
The document said Vancouver house prices in May were 30 per cent higher than a year ago. In Toronto, May prices were 15 per cent higher than a year ago.
Some of that is due to foreign real estate buyers who see Canadian real estate is as a relatively safe investment.
Morneau didn’t specify the kinds of measures the government might consider to cool down over-heated markets like Toronto and he didn’t say when Ottawa might act. But he promised a “deep dive” into those areas to determine whether steps such as more changes to the mortgage and amortization rules are warranted.
That’s the right approach, according to the Canadian Real Estate Association.
“Having evidence-based policies and policy measures is the way to go,” said Gregory Klump, the association’s chief economist.
“With the government’s efforts to get to the bottom of that we’ll have some better information on that toward the end of the year we hope,” said Klump.
Ottawa has already shown some creativity in changing the mortgage regulations, he said.
The most recent change in February raised the minimum down payment on homes over $500,000 from 5 per cent to 10 per cent on new mortgages for a CMHC-insured loan. But that had little impact on rising prices.
Before that the government cut amortization rates on insured mortgages twice: from 35 years to 30 in 2011 and then from 30 to 25 in 2012.
But changing the mortgage rules is a broad measure, said Klump.
“When they’re targeting Vancouver and Toronto they recognize it may result in collateral damage in other markets where they don’t need cooling, such as Calgary. They’re already seeing some challenging conditions,” he said.
The last set of changes didn’t tamp down prices because many of the affected buyers were move-up homeowners in the $500,000 to $1 million range, said BMO senior economist Robert Kavcic. Most had equity from a previous home.
“Even then, if somebody was forced to add a few percentage points to their down payment, in a lot of cases, it wasn’t too hard to find alternate sources of financing just to jump that hurdle,” he said.
In the end, it’s the monthly housing payment that influences buying decisions so there was a more significant impact when the government cut amortization periods for uninsured mortgages, said Kavcic.
“It had a noticeable shifting around of sales before and after the rule change which is a pretty good indicator that it was having an impact on the market,” said Kavcic.
Move-up buyers with 20 per cent or more down can still get a 30-year amortization.
“If they were to remove that 30-year (amortization) altogether that’s something that would probably have a bigger impact than that small change in down payment rules,” he said.
The Toronto Real Estate Board has suggested that the Toronto land transfer tax has discouraged some homeowners from listing their properties for sale. But the provincial growth targets that have discouraged new home building in the GTA is probably a bigger factor, said Kavcic.
“We’ve seen next to no new single detached construction. It’s all been condos. Last year we saw the smallest number of single, detached (home) completions in 20 or 30 years.”
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