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When you look at the overall situation, clearly the housing market in Canada is slowing down—some say slowing down too rapidly. The main damage, of course, is in Vancouver and Toronto. No surprise, because those two cities were experiencing significant price appreciation and activity in 2015 and 2016, and now we are simply undoing those years in those two cities. So the question is: What’s the focus? Where are we going? Is it a free fall? Or is it something that is healthy?
I believe that what we’re seeing now is a very healthy adjustment. I think that the number one reason for the slowing is simply gravity, especially in places like Toronto and Vancouver where prices simply reached a point where it became totally unaffordable. So gravity is a big force here, that’s one aspect.
The other, of course, is regulations. And here I’m talking about B20. B20 is a significant, significant force that is impacting the cycle of the market. Over the past year, the value of mortgage originations in the country as a whole went down by $25 billion. I estimate that roughly half of this decline was due to B20, due to the changes to regulations and the stress test. So this is a significant, significant test that is slowing down the market. And the question is whether or not it’s too much. Namely, the operation was a success—but. Because if you look at what finance is telling us, what OSFI—the regulators—are telling us, they are basically telling us: mission accomplished.
But the question is to what extent [did they] accomplish too much? And that’s the big debate now. I happen to think that we have to make B20 a bit more flexible. It’s not written anywhere that it has to be 200 basis points. It could be lower, but that’s a question of debate.
Now, one clear derivative of that is alternative lending. Alternative lending is the fastest growing segment of the mortgage market now, rising double the rate that other mortgages are rising.
Now, this is a direct consequence of the B20 stress test, because if you close a door due to qualification, another door is open. This door is alternative lenders. Here, we’re talking about mixed mortgage investment corporations and individual lenders. They account for about 14, 15% of the market now, up from about 10%, 8% just a few years ago. So clearly it’s rising very, very quickly. And I think that’s something that we have to take into account.
We have to a) ease B20, so you won’t open the door for alternative lenders. And also we have to regulate those alternative lenders. Because what we are doing now, we are transferring risk from the regulated segment of the market to the unregulated segment of the market. We are transferring risk from where there is light to where it’s dark, and that’s very, very risky. So that’s something that we should make sure that regulators are aware of.
The overall story is that clearly the housing is slowing. Affordability, higher interest rates and B20 led to a slowdown in the market. I view this slowdown as extremely, extremely healthy. I think that it’s a reflection of a market that was a bit too crazy in 2016 in Toronto, 2015 in Vancouver, and now we’re simply undoing crazy years, if you wish. It’s not a free fall. It’s simply a market that is looking for direction, a market that is in a price-search mode.
It’s not over yet. Clearly not in Vancouver, but also not in Toronto. And again within Toronto and Vancouver and other cities like Montreal, I will distinguish between presales and resales. The presale market is where you see most of the damage, especially in the low-rise segment of the market. I think that the recent market is much more stable and in Toronto it’s definitely stabilizing.