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A Bank of Canada study suggests that Ottawa's mortgage stress-test rules are only responsible for a small part of the drop in home sales.

Jonathan Hayward/The Canadian Press

The federal government’s mortgage stress-test rules are responsible for only a small part of the drop in home sales in Canada in the past two years, while a peak in prices and the bursting market bubbles in Toronto and Vancouver have played the biggest role in curtailing sales, according to a Bank of Canada study.

Although several groups in the real estate sector have blamed two rounds of tougher mortgage qualification rule changes for a steep drop in home sales in 2017 and 2018, the Bank of Canada’s latest research argues most of the drop was due to “deteriorating affordability” and a “dissipation of the froth” in major markets in Ontario and British Columbia.

“The direct impact of recent mortgage rule changes, in contrast, is estimated to be relatively small,” the study concludes.

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Organizations such as Mortgage Professionals Canada and the Canadian Home Builders’ Association have previously released research suggesting two new mortgage qualification rules – including a stress test on insured mortgages that took effect in October, 2016, and a test on uninsured mortgages that launched on Jan. 1, 2018 – have led to a steep drop in home sales in the past two years.

Those groups have joined other voices in the real estate sector in calling for modifications to the stress test, which they say is blocking too many people from being able to qualify for a mortgage. In a report last week, Benjamin Tal, deputy chief economist at CIBC World Markets Inc., said the mortgage stress test was the biggest factor behind an 8-per-cent drop in new mortgage borrowing last year, estimating the test may have reduced the amount Canadians borrowed for mortgages by up to $15-billion in 2018 compared with 2017.

But the Bank of Canada’s report offers an alternative conclusion, suggesting an unsustainable bubble burst in Canada’s most expensive markets and the resulting fallout has been the main factor in declining home sales.

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Bank of Canada analysts used loan-level micro data to try to isolate the impacts of various competing factors on resales of existing homes in Canada.

Comparing the first quarter of 2015 with the fourth quarter of 2018, they estimated the rising costs of buying a home – or a “deterioration in housing affordability” – would have led to a reduction in home resales of 46,000 units based on market fundamentals. About 40 per cent of that drop would be due to higher mortgage rates and the rest to home-price growth.

In addition, federal changes to mortgage rules would have lowered the estimated level of home sales in Canada by a further 10,000 units during that period, the report estimates.

However, the report estimates that a strong labour market in Canada and population migration to B.C. would have conversely added about 53,000 home purchases nationally during the same period. Those positive market changes should have almost entirely offset the expected 56,000 drop in sales, leading to a decline of just 3,000 sales between the two periods.

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Sales actually fell by 17,000 units between the two periods, however.

The report said the difference is explained in large part to a disappearance of the “froth” in housing markets in the Greater Vancouver Area and Greater Toronto Area. The pullback was not caused by economic fundamentals or mortgage policy measures, but by lower consumer confidence about prices increasing.

Bank of Canada senior deputy governor Carolyn Wilkins told reporters Wednesday that Vancouver and Toronto had more home sales in 2015 and 2016 than would have been expected based on factors such as employment and population growth. That suggests “froth” played a role in boosting market activity, she said.

Conversely, the more recent declines in sales in both markets have been larger than would be expected simply from policy decisions such as the mortgage stress test and rising interest rates, she told a news conference in Ottawa.

Home sales are now experiencing “the kind of under-shooting that you would see as froth works its way off,” she said.

In its monetary policy report released Wednesday, the central bank said it expects the impact of the B-20 mortgage stress-test rule will dissipate in many markets this year, although it could persist in the most expensive cities.

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The monetary report said consumers’ house-price expectations in B.C. and Ontario are stabilizing, which may indicate sales will grow again later this year, although there’s a risk the recovery could be delayed in Vancouver.

Bank of Canada Governor Stephen Poloz also told reporters Wednesday the market adjustment in Toronto and Vancouver is complicating the bank’s ability to monitor the impacts of policy changes on a national basis. However, he said other markets such as Halifax, Montreal, Ottawa and Winnipeg are seeing solid housing activity as the economy grows.

“This means that as the situation stabilizes in Toronto and Vancouver, the Canadian housing sector should return to growth overall later this year,” he said.

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