Housing prices are heavily influenced by mortgage rates. When rates decline, housing prices tend to rise as demand to get into the property market escalates. When mortgage rates increase, housing prices stall, stop or can even decline (depending on the market) as demand for property declines.
It’s a trend that’s been well understood for decades and now analysts are going on record to state that it’s the primary reason for B.C.’s lacklustre real estate market activity in 2018.
Of all the policies implemented over the last couple of years, the one with the largest impact is OSFI’s B-20 mortgage stress test that came into effect, nationwide, on January 1, 2018. According to analysts, B.C.’s real estate market saw a significant drop in home sales after the introduction of the stress test — with a 29% year-over-year drop as of August 2018. The result was a decline in the average home sale price of 2.5% (a seasonally adjusted number). According to analysts, no other tax or policy, including the foreign buyers’ tax, has had quite the same impact on B.C.’s residential real estate market.
The problem is home prices are outpacing wage growth rates this forces home buyers to require more leverage (and more expensive mortgages) to be able to afford a home, especially at current historically high prices. However, since incomes aren’t keeping up, the number of people that qualify for a mortgage under the new rules dropped significantly.
All this pressure means that mortgage growth has dropped to its lowest level since July 2001 (the same year when first Harry Potter and Lord of the Rings movies were released).
What’s worse is that mortgage growth is expected to slow down even more, as mortgage rates continue to climb. What analysts are predicting is that a continued increase in mortgage interest rates will continue to erode overall housing affordability across Canada and, eventually, this will decrease demand even further and eventually prompt overall price decreases in the Canadian real estate market. Keep in mind, say experts, mortgage growth doesn’t need to hit negative growth rates to affect prices, it just needs to slow down enough.
After many years of cheap and accessible loans, new buyers will now need to exercise patience and save up higher down payments in order to buy into the real estate market.