It’s been more than five months since the roll-out of new mortgage rules that forced even homebuyers with a larger downpayment to undergo a financial stress test.
A lot has happened since then. Home sales have recorded double-digit drops in Toronto and other overheated markets. And the pace at which Canadians have been accumulating debt has slowed down, much to the Bank of Canada’s relief.
One thing that hasn’t changed, though, is housing affordability.
April home sales dropped 35 per cent in Vancouver compared to the same month last year, but it still takes 12 times the pre-tax income of the average local couple to buy an average-priced home in the city. In Victoria, B.C., the benchmark home price is six times what the typical local family makes before taxes and prices are still going up. And in Toronto, where home sales are down over 20 per cent since a year ago, home prices are eight times average household incomes.
The same holds for not-so-hot markets in the Prairies and Atlantic Canada. When Global News compared housing prices and incomes in major cities across the country, it found that changes were minimal.
Saint John, N.B., St. John’s, Nfld., and Regina, Sask., are still the most affordable cities for homebuyers, followed by Charlottetown, Saskatoon, Halifax and Edmonton. That’s what the numbers show for December, before the new mortgage rules kicked in.
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If anything, Montreal is gradually becoming less affordable, but that trend has been afoot for a few years now. The same is true in Ottawa, although higher incomes there mean that affordability is holding up a bit better.
Home sellers not ready to give in
One reason why home prices are holding up despite plunging sales in some markets has to do with home sellers, said Penelope Graham, managing editor at real estate website Zoocasa.
“A lot of this is psychological,” she told Global News. “A seller who is intent on making a profit on their home sale is more likely to pull their listing off the market and wait out softer market conditions, rather than sell for less than their neighbours got six months prior.”
In fact, this is why the volume of home sales has taken a dive in some markets. Some people who would have otherwise been selling their home are staying put. Others pull their homes off the market after failing to get the price they wanted only to re-list the property a few weeks later.
But the new home price isn’t necessarily lower. In fact, sometimes it’s higher in the second listing, Graham said.
“The strategy depends on that specific market,” she noted. “These pricing skirmishes happen as market sales cool and have been rampant [in the Greater Toronto Area].”
Ontario’s Fair Housing Plan, which introduced a slew of market-cooling policies in April 2017, is also contributing to the trend, Graham said.
Mortgage rules were never meant to bring down home prices
The point of Ottawa’s stricter mortgage rules was to force Canadians to take on less debt and reduce the risk of borrower defaults to the banks.
“While the government certainly had concerns regarding the sustainability of the housing market in 2016 [and] early 2017, the main intent of [the rules] was to improve the quality of mortgages held by lenders, and to reduce the vulnerability they posed to Canada’s banking system and economy,” Graham said.
By demanding that homebuyers prove they’d be able to withstand a two-percentage-point raise in interest rates, the rules “insure against mass mortgage defaults, should borrowing costs change dramatically,” she added.
Rising interest rates are making things worse
Pricey housing markets in British Columbia and Ontario are also feeling the impact of a series of provincial policies that are explicitly meant to help improve affordability.
But while the combination of these measures and the federal rules seems to have at least tamed priced growth, there’s now a new force inflating the percentage of income that Canadians are spending on housing: rising interest rates.
According to National Bank of Canada, middle-class first-time buyers would now spend over 40 per cent of their pre-tax income to cover just the mortgage payment of a typical condo in Vancouver and Toronto.
“Since buyers can hardly lay out a higher share of their income on housing than these two markets already required, a decline of prices is conceivable over the next few quarters if rates rise as we expect,” the bank said in a recent report.
It remains to be seen who, if anyone, will get the upper hand in the current tug of war between sellers and buyers.
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