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Canada’s Cooling Down

18 September 2012

The weather is finally starting to turn for all those that needed a break from this summer’s blustering heat. But it was months before the temperature dropped that the housing market was already beginning to cool in Canada. The new mortgage rules went into effect on July 9 and ever since then, a fairly severe slowdown is happening. And it’s just what Finance Minister Jim Flaherty was hoping for.

“I was concerned about the level of indebtedness related to residential housing, including condominiums,” Mr. Flaherty told The Globe and Mail on Friday. “Four times we intervened in the mortgage insurance market in the last four years. And it is working. In fact, what I am seeing now in the most recent data is quite clear evidence that there is no boom. There had been the potential for a boom, but even the Toronto and Vancouver markets have calmed, including the condo markets.”

No boom, indeed. Data released by the Canadian Real Estate Association (CREA) yesterday shows that MLS sales fell by 5.8 per cent in August when compared with July, the biggest drop seen in two years. And while the MLS Home Price Index had increased by 4 per cent from where it stood in 2011, it’s still the slowest gain the Index has seen in over a year. The CREA is also forecasting a decline in sales next year, with Ontario seeing the biggest drop.

Commenting on this new data, TD Bank economist Sonya Gulati said, “The Canadian housing market has indeed ratcheted down its growth pace. In fact, in most local markets, it has reversed course, with price and sales contractions becoming more the norm.”

So the housing market is definitely cooling. And the new mortgage rules definitely seem to have something to do with that. But why this time? Why are there so many drastic changes after a rule change, when it’s happened three times before without such a noticeable difference?

It’s for a few reasons, actually.

Well, the first is the impact the changes have on actual mortgages. And this last round of rules has got a big one! Cutting insured mortgages back from a 30-year amortization to 25 years is the equivalent of a 0.9 percent interest rate hike. This expands on the last change that brought mortgages from 35 years to 30 years; the equivalent of a 0.6 per cent interest hike.

But, another reason why this latest round of changes is working much better than the others is because Mr. Flaherty simply didn’t show his cards as soon this time. With the other changes, Canadian homebuyers had at least two months to find the home of their dreams and still get a mortgage under the old rules. With this one though, he gave us only 18 days notice, not leaving a whole lot of time for scrambling.

Some still aren’t happy though. David Madani, an economist at Capital Economics, says that housing prices are still going to plummet. And that’s going to happen with or without the new rules.

“The first sign of trouble at the peak of the U.S. housing bubble was that home sales began to drop in 2005, well before house prices began to fall in 2006.”

Mr. Madani still believes that home prices will fall by 25 per cent in the next year or two.

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