New buyer stress test set to limit home price appreciation in 2018

According to a Royal LePage market survey forecast, released on Dec. 13, the House Price Composite, which measures home prices in 53 key Canadian cities, is expected to increase 4.9 per cent by the end of 2018 to $661,919, in the face of a series of measures aimed at affordability challenges in Greater Vancouver and the Greater Toronto Area (GTA).

One of the most significant regulatory interventions in the housing industry in years is the Office of the Superintendent of Financial Institutions (OSFI) mortgage financing stress test, which takes effect on January 1. The stress test targets existing and prospective homeowners applying for a mortgage, requiring them to meet stricter criteria when seeking new financing.

Royal LePage anticipates the new measure will slow the housing market, particularly in the first half of 2018, as buyers adjust both their expectations and finances. With a large number of existing homeowners potentially failing the test when they refinance next year, a temporary reduction in consumer confidence may further stagnate price growth as potential buyers and sellers take a ‘wait and see’ approach. Also, some potential move-up buyers will likely delay listing their homes because they will not be able to access sufficient financing for their next purchase. With further diminished affordability, it is likely that demand for entry-level properties will surge. In most urban centres, this will be most evident in the condominium segment.

“It is prudent that policy makers introduce measures that help protect the housing market from runaway price inflation,” said Phil Soper, Royal LePage president and CEO. “However, natural supply and demand forces will always triumph over regulatory tinkering. Insufficient housing supply in Canada’s largest cities will begin to drive significant price increases to higher than normal levels once the market adjusts to the new stress test.”

Decreasing, or already low, inventory levels are expected to continue to define the markets in many large urban centres including the GTA. Adding to the already bloated housing demand backlog, Ontario experienced a surge in interprovincial migration in 2017, putting increased pressure on the GTA housing markets. Demand from immigration, alongside demand from peak millennials, (born between 1987 and 1993), who are increasingly becoming home buyers, will continue to outpace supply.

According to a recent Royal LePage advisor survey on rental demand, 76 per cent of agents who offer rental services in the GTA saw a year-over-year increase in multiple offers and 68 per cent of those respondents cited affordability as a barrier to home ownership as the number one factor driving rental demand. As a result, the pipeline of potential homebuyers providing a market price floor is growing. That growth trend is expected to continue through 2018.

Canada’s economy is expected to expand by 2.1 per cent in 2018, with all provinces, with the exception of Newfoundland, expected to see growth. Economic growth is an important driver of healthy housing markets.

“Most Canadians know how important the resource sector is to our economy but fewer understand just how important the real estate industry is to Canada,” said Soper. “In 2016, 13 per cent of the country’s GDP was driven by real estate.”

“When people are confident about their jobs and optimistic about the health of their country and their city, they will invest in a home,” he added. “At projected levels of demand, Canadian housing is poised for growth for years to come.”

Home prices in the GTA are expected to increase 6.8 per cent in 2018, rising to an aggregate price of $901,392.

As a result of the OSFI stress test, sales for detached properties are expected to soften in the first half of the year as both buyers and sellers adjust their price expectations. However, sales volumes for the full year are expected to remain at a similar pace as 2017.

“Relative to recent years, 2018 is expected to be a good year for buyers and this is a continuation from what we are currently seeing in the market today,” said Shawn Zigelstein, a Toronto-area sales representative. “While the condo market should continue to see price growth from high demand, buyers looking at detached properties in the first quarter will be able to ask for conditions, have a much greater selection and should be competing against fewer multiple offers.”

Leave a Reply

Your email address will not be published. Required fields are marked *

Share This