The Introduction Of The New Stress Test May Lead To An Economic Slowdown

Canadian economists state that the country’s real estate market will slow down this year due to tighter mortgage stress tests that will put pressure, and it could worsen if an expected interest rate hike makes buyers to cancel their plans on making a purchase.

Sometime this week the Bank of Canada is expected to make its first interest rate announcement of 2018. Most reporters predict will hike the country’s benchmark rate to 1.25 per cent or by 25 points after the economy’s strong performance the previous year plus the strong job report from November. However, the interest rates may be increased a few more times this year that’s if the economy maintains it’s pace.

The predicted hikes may lead to disturbing buyers who are already troubled by the new and hasher regulations which were implemented on January 1st by the Office of the Superintendent of Financial institutions. These new regulations are for uninsured mortgages, that have elevated five years, and fixed mortgage rates that were increased by the CIBC, RBC and TD banks last week.

Benjamin Tal, the chief deputy chief economist of CIBC said in a statement “This is the most significant test the market has seen in the recent years.”

Tal predicts a market slowdown in the first quarter of the year as homebuyers who were planning on buying a home consider whether they should rent of live with their family for a while until Canada is used to the new regulations.

“The big question though is to what extent investors will stop buying,” Tal mentions. “That will carry a big effect, but it’s still the biggest unknown.”

In the sales for 2018 forecast of the Canadian Real Estate Association predict that there will be a 5.3 per cent decrease in national sales to 426,600 units this year. That is up to 8,500 units dropped from the last forecast mainly because of the introduction of the new stress test. However, this past Monday, the association published a report indicating home sales went up by 4.5 per cent in December and the average national home prices reached around $496,500, that’s up by 5.7 per cent from one year earlier.

The report also states that the hike is most likely to cause homebuyers to rush into purchasing homes before they are compelled to submit to the uninsured mortgage regulations. These new regulations require potential homebuyers with more that 20 per cent down payment to verify that they can meet the qualifying rate of the greater of the contractual mortgage rate plus two percentage points or the five year benchmark rate released by the Bank of Canada.

CREA’s chief economist, George Klump stated in the report “It will be interesting to see if the monthly sales activity continues to rise despite tighter mortgages regulation.”

Also, it indicated the number of homes that were on the market went up 3.3 per cent in December from the month before and in December home sales went up by 4.1 per cent on a year over year basis.


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