The Canadian Real Estate Association reported today that national home sales plunged 9% from January to February, with 75% of local markets, including all major cities, recording fewer transactions.
It’s not the first time CREA has reported such a steep month-over-month decline—home sales also dropped sharply last January when the mortgage stress test came into effect—but February activity has not been this slow in a decade, since 2009.
Year-over-year home sales were down 4.4%, making this month a full 12% below the 10-year February average. In British Columbia, Alberta and Newfoundland, sales were more than 20% below their 10-year average for the month.
“February home sales declined across a broad swath of large and smaller Canadian cities,” said Gregory Klump, CREA’s chief economist. “The housing sector is on track to further reduce waning Canadian economic growth. Only time will tell whether successive changes to mortgage regulations went too far, since the impact of policy decisions becomes apparent only well after the fact. Hopefully policy-makers are thinking about how to fine-tune regulations to better keep housing affordability within reach while keeping lending risks in check.”
CREA largely blames the new mortgage regulations for the slow housing market. Starting in January 2018, borrowers had to qualify for a loan at least 2% higher than their contract rate. The policy was intended to reduce interest rate risk, amid reports that Canadians are one of the most indebted in the world, with a debt-to-income ratio of around 177%—the large majority of that due to mortgages.
The federal bank regulator felt Canadians were financially unprepared for interest rates to rise, as they were on track to do, which could pose a serious risk to the economy as a whole. If Canadians are spending all their income keeping up with their mortgages, they will have less to spend on consumer goods—still the main driver of our economy.
Of course, that means many who would otherwise qualify for homes are now either forced into less expensive options, need to spend more time saving or are pushed into credit unions or private lenders, which are not bound by the same mortgage regulations.
The stress test was intended to keep prospective buyers who could not comfortably afford their mortgage out of the market, and so it has. But realtors, sellers and borrowers desperate to own are understandably not pleased.
“For aspiring homebuyers being kept on the sidelines by the mortgage stress test, it’s a bitter pill to swallow when policy-makers say the policy is working as intended,” said CREA President Barb Sukkau. “Fewer qualified buyers means sellers are affected too.”
Home prices slid along with sales, declining 5.2% to $468,350 year-over-year. Excluding the hyper-expensive Toronto and Vancouver markets from that number reduces the national average home price to $371,000.
To see how each local market performed, check out the infographic below:
Correction: This post has been updated to correct a typo in the debt-to-income ratio.