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For sale signs line the street in Vancouver on Aug. 2, 2012.Rafal Gerszak/The Globe and Mail

Canada's housing market is cooling rapidly in the wake of government changes to mortgage insurance rules, amid suggestions that many potential first-time buyers are opting to remain tenants.

Indeed, the changes made by Finance Minister Jim Flaherty in July appear to be having more of an impact than his earlier attempts.

The latest measure of the housing market, released Monday by the Canadian Real Estate Association (CREA), illustrates the extent of the summer slowdown in sales, and has prompted the group to cut its forecasts for both sales and prices.

Sales over the Multiple Listing Service (MLS) system fell 5.8 per cent in August from July, the largest month-over-month decline in two years. The MLS Home Price Index was up 4 per cent from a year ago, but that gain actually marks the slowest rate of increase in more than a year.

"The Canadian housing market has indeed ratcheted down its growth pace," Toronto-Dominion Bank economist Sonya Gulati wrote in a research note after the data were released. "In fact, in most local markets, it has reversed course, with price and sales contractions becoming more the norm."

CREA is now forecasting a drop in sales next year. It expects them to fall 1.9 per cent to 457,800 units. "Activity is expected to ease in all provinces except Alberta and Manitoba, with Ontario registering the largest decline," it said.

It expects the average national home price to rise by just 0.6 per cent this year, to $365,000. And next year, it says it will likely fall one-tenth of a per cent to $364,500, with Ontario and B.C. seeing small price declines while other provinces see modest gains.

As evidence mounted that rock-bottom interest rates were fuelling house prices and consumer debt loads, Mr. Flaherty has changed mortgage insurance rules four times, each time making it more difficult for consumers to take on housing-related debt.

While the three previous rounds crimped both housing activity and the demand for credit, economists and real estate industry experts say this latest round, which took effect July 9, looks as if it is having a bigger impact.

One reason the July changes seem to be more effective is that Ottawa learned its lesson. With the first set of changes in 2008, Mr. Flaherty gave consumers more than three months' notice before the new rules took effect. As a result, many buyers who wanted to make a move under the old regime had time to do so. In the following two rounds, he gave roughly two months' notice. This time, he shocked the market with just 18 days' warning.

And the latest changes, which include cutting the maximum length of an insured mortgage from 30 years to 25 years, are bigger because they build on the previous moves. For example, going from a 35-year amortization to 30 years is equivalent to a 0.6-percentage-point hike in interest rates, according to Toronto-Dominion Bank chief economist Craig Alexander. Going from 30 years to 25 is equivalent to a 0.9-percentage-point hike.

A number of economists, real estate agents, and industry observers say that many prospective first-time buyers have found themselves unable to secure a mortgage, especially in Toronto and Vancouver, and are therefore remaining renters.

Paula Roberts, a mortgage broker based in Markham, Ont., said one of her clients, a young teacher, was preapproved under the old rules, but now that she has found a home she likes, is having trouble securing the mortgage. She will likely have to get someone to co-sign the loan, or come up with a larger down payment, Ms. Roberts said.

"It's really hindering people," she said. "Her rent is basically the same as her mortgage payments." In Ms. Roberts' opinion, "it's always better to try to buy something instead of rent."

The changes are still filtering their way through the system, their ultimate impact on house prices is not known, but Mr. Flaherty suggested to The Globe and Mail in an interview Friday that they are doing what he intended and he is no longer worried about a real estate bubble.

"I was concerned about the level of indebtedness related to residential housing, including condominiums," he said. "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," he said. "There had been the potential for a boom, but even the Toronto and Vancouver markets have calmed, including the condo markets."

Other observers continue to be troubled by the market and mortgage debt loads. While the rule changes are undoubtedly having a significant impact, they can only do so much, and interest rate hikes will be required to truly curb consumers' appetite for mortgage debt, Mr. Alexander said recently.

David Madani, a bearish economist at Capital Economics, reiterated his forecast Monday that house prices will fall 25 per cent in the next year or two. "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," he wrote in a research note.