Housing policy is being created for the whole country based on markets in Toronto and Vancouver

They are Canada’s two hottest housing markets, and even some in the real industry don’t question the need to cool prices in both Toronto and Vancouver, but that opinion changes once you get beyond the orbit of those two cities.

There is almost a sense of bewilderment in places like Halifax and Edmonton or Montreal, where people wonder what overheated housing market anyone is talking about, because it’s not happening in their jurisdiction. DBRS Inc. said this week that from July 2015, to July 2016 prices across the country are almost flat once British Columbia and Ontario are excluded.

“It’s raining in Vancouver, but first-time home buyers need an umbrella in Alberta,” said Donna Moore, chief executive of the Alberta Home Builders’ Association, who would like the government to consider different areas of the country on their own when it comes to policy. “We’re concerned that this policy is aimed at Canada’s hottest real estate markets.”

That’s not just a view out west. Sherry Donovan, chief executive of the Nova Scotia Home Builders’ Association noted new home construction in Halifax is down to about 450 homes annually after being as high as 1,200 just a few years ago.

“We definitely don’t need any more cooling,” she said.

It’s clear some markets are already hurting. This month the Calgary Real Estate Board reported prices in the city were actually down 3.78 per cent over the first nine months of the year compared to the same period in 2015, while sales were off 8.3 per cent during the period. Compare that to Toronto, where sales in the region were up 21.5 per cent in September from a year and and prices rose 18 per cent over the same stretch.

Economist Will Dunning, who consults for Mortgage Professionals Canada and once worked for Canada Mortgage and Housing Corp., in a 16-page report out this week questioned the broader implications of a housing policy that is sure to hit first-time buyers in markets beyond the two priciest.

Among the key measures in the changes that took affect Monday is a provision that consumers qualify for a mortgage based on the posted rate for a fixed five-year mortgage at the major Canadian banks. That rate is now 4.6 per cent, while the actual lowest rate in the marketplace is 1.95 per cent – meaning consumers will qualify for far less debt.

“(CMHC chief executive) Evan Siddall says this is going to be good for the economy because it will reduce our growth of indebtedness,” Dunning said. “Yeah, that’s good in the long run, but there is a pretty nasty path to get there. You reduce housing demand to get there and you will directly affect the economy, and indirectly. The serious risk is prices start to fall and then this will snowball.”

Using a sales-to-new-listings ratio as measure of the health of the market, Dunning says at 60.6 per cent the country is well above a balanced market threshold of 52 per cent. Suggesting an eight per cent a drop in sales is the consensus among economists for the impact of the new rules, and he says the SNLR will drop to 55.8 per cent in that scenario. If the drop is 16 per cent in sales, that will take the market to a 50.9 ratio — a buyer’s market.

We understand why the government is concerned (with debt) but when you monkey with the market, there is always risk

“The biggest impacts are going to be in the places with the weakest markets,” Dunning said. “That’s what we saw in 2012 (the last time there were major changes to mortgage rules), the biggest impact was not in Toronto but in markets that are soft.”

In Alberta, a balanced market is considered to have a 56 per cent SNLR, but that eight per reduction in sales will drive the province down to 43.8 per cent.

Hélène Bégin, senior economist with Desjardins Group, said the new rules will have a more muted impact on Quebec partially because the province has far fewer foreign buyers — at most five per cent of purchases on condo investment in Montreal.

Bu Bégin said the changes to the mortgage rules will affect everyone across the country.

“In Quebec, the average price is close to $300,000,” she says, adding prices are so low the province could avoid any major impact because so many consumers will be able to scrape together a 20 per cent down payment to avoid being impacted by the changes. “But sure it will have an impact on the market. Look, in 2012, when they restricted amortization from 30 years to 25 years, it had an impact (on sales) even if prices didn’t go down.”

David Foster, a senior director of with the Canadian Home Builders’ Association, notes the government itself seems unsure of the impact of the rules and was forced to issue some clarifications on the Friday before they went into effect.

Changes included allowing consumers refinancing their loans to be exempted from the new stress-test levels and allowing previous property purchases in progress to be grandfathered until deals close. The government agreed that for another six weeks consumers would be exempt from new rules as long as a deal was funded or closed by May 1.

“We understand why the government is concerned (with debt) but when you monkey with the market, there is always risk,” Foster said. “Some people might think (the changes) are perfect but within a week they had to revise the rules — it shows they missed some stuff. Nobody in finance ever talked to our industry.”

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