Canada is one of those housing markets which have for many years now defied gravity and an array of new regulations from the government. The recent 15% “foreign investment tax” has had an impact but many experts believe that further tightening of regulations and funding availability could have a greater impact. Suggestions that the Canadian market will follow the housing bubbles in Ireland, Spain, UK and the US which “have popped” seem a little wide of the mark but nevertheless they do give food for thought.
Mortgage guidelines
The Canadian banking regulator has issued proposals that those applying for bank funded mortgages will need to prove their financial strength to a greater extent than ever before. In what is deemed a “stress test”, if these proposals go through then new mortgage applicants will need to show they could handle a 200 basis point increase on the rate on offer. This may seem a little harsh to some people, it may seem a little over the top but with worldwide interest rates now moving upwards, although well off traditional levels, this is maybe an approach that other countries should consider?
There is already a stress test system in place for those looking at default insured mortgages although as ever there will be exceptions to the rule on some occasions.
Rising interest rates
As we touched on above, worldwide base rates are set to move higher as slowly but surely the worldwide economy pulls away from the 2007/8 US mortgage crisis induced collapse. The bond markets, which are always ahead of the game, are already suggesting that Canadian base rates will increase with some suggesting July or possibly September. As a consequence of movement in the bond markets fixed-rate mortgages across Canada have already increased by 0.5% over the last few weeks. It seems highly likely there will be further increases in the short to medium term as we move closer towards the inevitable rise in Canadian base rates.
Froth disappearing from Canadian housing market
It is all good and well people talking of property price collapses, blooming consumer debt and the need to tighten regulations in the short to medium term, but let’s not forget the Canadian housing market has been one of the strongest in the world in recent years. While there were concerns that overseas investors were pushing prices above and beyond the affordability factor of first-time buyers, this is not necessarily the case across the board. Prices are beginning to soften, buyers are starting to sit on the sidelines watching events and eventually sellers will begin to reduce their asking prices.
Amid concerns that mortgage funding could become tighter we will likely see less people looking to remortgage their properties. The likelihood that less properties will be listed will offer a degree of support in the short to medium term but we are starting to see signs that the froth is disappearing from the Canadian housing market.
Conclusion
Talk of a collapse in Canadian property prices at this stage appears well wide of the mark. Let’s not forget, this has been one of the strongest markets in the world with prices increasing in a manner which seemed to be defying gravity. Tightening of mortgage funding regulations, talk of higher base rates and fewer buyers competing for fewer properties will have an impact in the short to medium term. Are we really on the verge of a Canadian property price collapse? Not out of the question but highly unlikely.