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  • KPB & Co Research


On rare occasions, the interests of Canadian fiscal and monetary authorities align, and both agents of the state act with urgency to address matters of public interests. In October 2016, federal authorities with the aid of the Bank of Canada implemented mortgage stress test rules to curb rising debT and home prices. Roll forward two and a half years, and Canada is facing a scenario where house price growth has softened, the economy is slowing, and housing affordability is at the surface of the public's consciousness. Today, both the Central Bank and the federal government hardly mention the term "housing vulnerabilities" but are hooked on the term "housing affordability". Looking at the current state of home prices and the level of debt held by 'john public', housing vulnerability issues appear to be lurking in the shadows while policymakers focus on housing affordability to appease the "murmuring crowd".


The implementation of the stress test rules, together with several rounds of central bank rate increases have had the desired effect of reducing housing demand and prices in the near term. Within 1-year of the implementation of the stress test rules the march up in home prices halted, and starting in May-2017, the pace of price growth decelerated. In spectacular conflicting fashion, the policy that is needed to make home prices more affordable could make homes unaffordable today, as it reduces the availability of credit to purchase homes. After implementing policies to cut back Canadians' appetite for homes, the federal government, with an election coming up, began to have second thoughts. In the 2019 budget, the federal government announced the first time home buyers incentive plan to make it easier for Canadians to purchase a home. In addition, the rounds of rate increases in mid to late 2018 were followed by a sharp slowdown in economic activity in Q4 2018, which was in turn followed by more accommodative monetary policy heading into 2019. Mortgage rates became more attractive as the yields on long term Government of Canada bonds declined - the rate on which most mortgages are priced.




Recent data from the Canadian Real Estate Association (CREA) show that home prices continue to trend up, but the pace of increase in home prices has slowed markedly. Home price growth across Canada turned negative in March 2019 for the first time since September 2009, which is almost 10 years ago. September 2009 marked the end of a 1-year stretch in which home prices declined consistently. This fact leads us to wonder whether the halt in-home price growth is also a reflection of much slower economic activity, as the tepid price growth occurred at the same time as economic activity slowed. There is also the possibility that the reduction in mortgage rates is having muted impact on mortgage growth and by extension home prices. This muted impact is likely to occur given that the mortgage stress test's qualifying rate has hit the Bank of Canada's average five-year posted rate of 5.34%. The stress test rate is the higher of the customer rate + 2 percentage points and the posted rate. In this context, reductions in mortgage rates will likely not enable more people to get mortgages.



The federal government and the central bank have a dilemma to contend with, they can stay put and allow the economy to falter, home prices to decline thereby addressing affordability issues. More affordable housing would definitely be good for the election message. At the same time, a decline in the housing market will remove steam from an already slowing economic engine, which will, in turn, reduce affordability for not just housing but all goods and services. Of course, both agents of the state can also choose to take action and provide much more economic stimuli either through lower rates or increase government spend or both. In this scenario, house prices will certainly march higher leading to more public concerns about affordability, and worse yet the bigger issue of "housing vulnerabilities".



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