A new mortgage-qualification rule sent a chill through Canada's housing market in January after buyers rushed to make purchases in December to beat the Jan. 1 deadline and sellers sat tight while assessing the fallout.
The Canadian Real Estate Association (CREA) said sales fell sharply across Canada in January after climbing to their highest monthly level on record in December. CREA said the number of homes sold fell 14.5 per cent in January over December on a seasonally adjusted basis, with sales declining in three-quarters of all local markets, including virtually all major urban centres.
The Greater Toronto Area recorded a 27-per-cent drop in January over December, while sales fell 32 per cent in Hamilton-Burlington, 20 per cent in Kitchener-Waterloo and 19 per cent in the Niagara region. The Ottawa region had the largest drop in sales in January, falling 33 per cent on a seasonally adjusted basis.
Canada's banking regulator announced a new rule in October, which took effect on Jan. 1, requiring home buyers to prove they could still afford their mortgages even if interest rates were 2-percentage-points higher than the negotiated rate. The rule appears to have had a particular impact in the more expensive Toronto region, where many buyers were already stretched to afford a home, even before the tougher qualification standards took effect.
CREA chief economist Gregory Klump said the decline in January sales "provides clear evidence" that December's strength was attributable to a "pull-forward" in sales as buyers hurried to beat the new mortgage rule.
Bank of Montreal economist Robert Kavcic said the January sales slump "is largely payback" for an increase in sales in the final three months of 2017. "Regionally, sales volume declines were widespread across the country in January, suggesting that the nationally-implemented policy change did indeed bite," Mr. Kavcic said in a research note.
The impact of the new stress test was also felt on the seller's side of the equation, with many people holding off on listing their homes while assessing the fallout of the rule change on the market. New listings in January fell 22 per cent nationally compared with December, on a seasonally adjusted basis, including a 39-per-cent decline in the GTA and a 45-per-cent drop in listings in Kitchener-Waterloo.
Christopher Alexander, Re/Max regional director for Ontario and Atlantic Canada, said he isn't convinced the stress-testing rule is having a major effect, or will continue to weigh on the market in the longer-term. He said January is hard to read because it comes on the heels of a complicated period and a late-year recovery in the housing sector in the GTA. "I still think it's too early to tell – one month never really gives you a clear picture, usually you need at least three months," he said.
Mr. Alexander said his offices are still seeing high buyer demand in many markets, including the GTA, and buyers are facing a lack of inventory in many pockets.
He forecasts a stronger spring market, but says the spring rush may get under way later than usual as buyers absorb the policy change, and will likely start in late April and early May instead of late March and early April.
Shawn Zigelstein, a Royal LePage realtor in Richmond Hill, north of Toronto, said some of the jump in sales late last year was attributable to an increase in available inventory in many GTA markets, especially north of the city. He said he saw many clients hurry to get preapproved mortgages in December before the stress-test rule took effect, but didn't feel most clients were in a huge rush to buy before the end of the year.
Mr. Zigelstein expects many of them will proceed to buy in the next couple of months, especially since the suburban region north of Toronto still has a lot of unsold inventory.
"A lot of people still believe the market is still adjusting, and a lot of people are still waiting to see where the market goes," he said.
Royal Bank of Canada economist Robert Hogue said the sharp decline in new listings in January is likely owing to some sellers moving up their listings to November and December, while others pulled their properties off the market in January because of the mortgage-rule uncertainty.
"We believe that many would-be sellers were in full-blown wait-and-see mode in January," he said in a research note. "This tells us that there are significant psychological and strategy components at play at this stage."
He forecasts a "bumpy ride" in coming months, with total national sales falling almost 3 per cent in 2018 compared with 2017 and average prices rising a modest 2.3 per cent Canada-wide in 2018 after climbing 11.1 per cent in 2017.
CREA said average sale prices fell 2.4 per cent in January over December on a national basis, but were up 2.3 per cent compared with January last year.