Canadian home sales fell 14.5% between December and January, marking the lowest sales level in three years as the housing market was hit last month by a double whammy of tighter mortgage rules and lending rate hikes.

Data released by the Canadian Real Estate Association Thursday suggested that January activity was down in 75% of all local markets and virtually all major urban areas, especially in Ontario’s hot spot in the Greater Golden Horseshoe. The decline was less significant on an annual basis, with sales falling 2.4%.

Sales climbed to a record monthly high in December, according to CREA’s figures, ahead of the stress test that requires all potential buyers qualifying for a mortgage show they can manage interest rate increases.

Read: Housing starts hold steady in January: CMHC

“The decline in January sales provides clear evidence that the strength in activity late last year reflected a pull-forward of transactions, as rational homebuyers hurried to purchase before mortgage rules changed in 2018,” said Gregory Klump, the association’s chief economist.

The federal banking regulator introduced tougher rules for uninsured mortgages beginning Jan. 1 that require a stress test for borrowers with a more than 20% down payment. They now have to prove they can service a mortgage at a qualifying rate of the greater of: the contractual mortgage rate plus two percentage points, or the five-year benchmark rate published by the Bank of Canada.

The monthly decline “is largely payback” for buyers rushing to sign deals in the last three months of the year, ahead of the new rules, said Robert Kavcic, senior economist at BMO Capital Markets, in a note.

The January market also dampened due to the Bank of Canada’s decision to raise interest rates to 1.25%, up from 1%. It was the bank’s third increase since last summer, following hikes in July and September.

The central bank’s interest rate increase impacts variable-rate mortgage holders, but those who opt for fixed mortgages also saw a rise in the five-year fixed rate—amid rising bond yields and a stronger economy.

CREA noted that January home sales are on par with the 10-year monthly average, and that a large decline in new listings prevented the market balance from shifting in favour of homebuyers. The average price of a home rose by 2.3%, when compared with last year, at just over $481,500.

Read: Toronto home sales down 22% from year ago

The national sales-to-new listings ratio was 63.6% in January. A ratio reading above 60% generally indicates a sellers’ market.

The number of newly-listed homes was at the lowest level since spring 2009. About 85% of all markets had fewer listings. The Greater Toronto Area led the decline, with large percentage drops also in British Columbia’s Lower Mainland, Vancouver Island and the Okanagan region, as well as parts of Ontario.

“Interestingly, new listings plunged,” Kavcic said, highlighting a 21.6% drop in listings from December 2017 to January 2018 that he said allowed the market balance to tighten up at the national level.

The highly anticipated report confirmed expectations for how the market would react to the new mortgage rules, Michael Dolega, a senior economist with TD Economics, wrote in a note. He expects some near-term volatility to continue as buyers and sellers absorb the fall out from the new rules and rising rates. But, Dolega said “some stabilization” should occur by the middle of the year.

“Thereafter we expect activity to remain weighed down by rising interest rates, but with markets largely in balanced territory prices should remain well supported,” he said.

The new mortgage rules created uncertainty and confusion for homebuyers, said CREA President Andrew Peck in a statement.

“At the same time, the changes do nothing to address government concerns about home prices that stem from an ongoing supply shortage in major markets like Vancouver and Toronto. Unless these supply shortages are addressed, concerns will persist.”

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