How Mortgage Credit Deceleration Will Affect the Real Estate Market

On March 15th, Mark Ting discussed the Bank of Canada’s decision not to raise interest rates as well as the implications of “mortgage credit deceleration” on the local real estate market.   Below are the highlights of his interview with CBC’s “On the Coast” host Gloria Macarenko.

The Bank of Canada decided not to raise the interest rate last week, what were the reasons behind that decision?

They gave many reasons, including the uncertainty over NAFTA, weaker home sales, government intervention on the real estate market at both at the Provincial and Federal level, and “mortgage credit deceleration.”

If you are unfamiliar with the term “mortgage credit deceleration” it simply means that fewer mortgages are being issued by the banks, likely due to the stress test.  Fewer people are qualifying for mortgages or if they do qualify, it is for a reduced amount.

How has the “mortgage credit deceleration” affected the housing market?

The sales and prices of more expensive single-family homes have been falling since 2016, a drop which had more to do with the foreign buyer restrictions than the stress test. The “mortgage credit deceleration” is also negatively affecting sales of single-family homes but at all price points, not just at the high end.

The condo market, on the other hand, where people can still get mortgages, continues to see strong demand and price appreciation.  For example, year on year condo prices in Surrey are up 50% and climbing. So it’s definitely a tale of two markets, low to medium price condos are hot and single-family homes are not.

Does that mean that developers are likely to build more condos to take advantage of the increasing prices and heightened demand?

Often it comes down to financing as it isn’t just home buyers that are being turned down for mortgages, it is developers as well.  Last weekend I was hanging out with a developer friend of mine who is concerned about the future of his business.   He isn’t a big developer, he mostly sticks to single-family homes or small condo projects.

Recently he went to the bank to finance the purchase of a building lot.  The purchase price was $2.2M and the bank agreed to finance the purchase but only if my friend had a down payment of 40% ($900K).  Like most people or small businesses, he didn’t have $900K sitting in the bank. Even if he had, it would only be enough to secure the land which left nothing to build the actual house. In the end, he couldn’t raise the necessary down payment, so the deal died.

The Bank of Canada is monitoring the building sector closely.  If these financing hurdles persist and the building sector slows, the trickle-down effect throughout the economy could be significant, particularly in BC.

If the “mortgage credit deceleration” continues, how will it affect the Bank of Canada’s decision to increase interest rates in the future?

The Bank of Canada is concerned about the elevated debt levels of Canadians. We keep borrowing because the cost to do so is still low- but it’s increasing.  In fact on average Canadians are spending 9% more servicing their debts than they did back in late 2016.

From the Bank of Canada’s perspective, raising rates is good and bad. Good in that people stop borrowing as much and try to pay off the more quickly, but bad in that those who are already stretched financially can’t afford the higher payments or don’t have the ability to pay off the debt at all.

Do you expect additional rate increases later on in the year?

My guess is that there is one more interest rate hike coming sometime in 2018, perhaps in July.

Back in January, the expectation was for 3 or 4 rate increases throughout 2018.  Now people are only expecting 2 or 3 hikes, one of which already happened in January.

To make a long story short, we are losing our competitive edge on the international stage. Foreign investment goes to the path of least resistance and from a regulatory and tax P.O.V. and that’s no longer Canada—it’s the US.   To counter this trend and regain our advantage the tried and true strategy is to devalue the Loonie. This would mean keeping Canadian rates low while the US hikes theirs.

At the moment is appears that the Bank of Canada is pushing for a lower Loonie. They didn’t raise rates last week and hinted that they wouldn’t in the future.  The strategy appears to be working as the Loonie has already dropped from 82 to 76.5 cents, a 9% change in less than 2 months.

Listen to the full interview here with CBC’s On the Coast. The interview with Mark Ting starts at the 1-hour 27-minute mark.