Canadian Housing Market Adjusts to a New Reality

Recent changes to mortgage rules and interest rates are potentially altering the shape of Canada's housing market.

Mortgage changes, which took effect in January 2018, meant that home buyers making down payments of 20 per cent or more have to qualify for mortgages using the larger of the Bank of Canada's (BoC's) benchmark rate (4.99 per cent) or the rate in their contract plus 2 per cent.

Canada's big banks also increased five-year fixed rates, which made that option more expensive to those who had finally decided on a fixed rather than variable mortgage. Shortly after that increase, the BoC raised its overnight rate to 1.25 per cent; industry watchers believe there will be another increase before year-end.

The impact of these changes on the Canadian housing market is expected to be significant. Most home buyers will be looking at a smaller maximum mortgage, and those with financial challenges will face even greater trials. The upshot: Potential home buyers have a choice of lowering their sights or saving for a larger down payment. Sellers might need to become more price-competitive to attract scarce buyers.

Although it was early days, virtually all local markets reflected the changes in January's statistics: Month-over-month home sales across the country dropped by a seasonally adjusted 14.5 per cent, according to the Canadian Real Estate Association, and average sale prices fell by 2.4 per cent. New listings were down by 22 per cent.

Whether this downward turn continues once the spring market is fully underway is anyone's guess. However, it's likely both buyers and sellers will need patience and a new attitude to weather this one-two-three punch.