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New lending rules set to take effect next week coupled with mortgage rates that are creeping higher are expected to slow Canadian home sales in 2016, according to TD Economics.
The bank’s economic research arm is now forecasting existing home sales to amount to 488,600 units by the end of 2016, a 3.1 per cent drop from last year. In 2015 transactions numbered about 504,200, a 5.1 per cent increase compared to 2014.
Despite the Bank of Canada’s near historically low target for the key interest rate, TD notes that some banks have hiked the five-year special mortgage rate by as much as 30 basis points from December to January.
“History suggests that a 30 basis point rate increase translates into a 5 per cent to 10 per cent decline in existing home sales over a period of two quarters,” TD said, adding activity would still remain above “long-run averages.”
The key interest rate influences mortgage rates, but despite the Bank of Canada keeping it at a historically low level, rising operating costs for banks are pushing rates they offer to consumers higher.
In July this year, the Canada Mortgage and Housing Corporation is set to start charging higher rates to financial institutions for the loans it insures.
Meanwhile, down payments will be getting more expensive for some homebuyers as another rule the federal Liberal government put forward in December takes effect February 15th, further cool activity. For government insured mortgages, the minimum down payment is rising to 10 per cent from 5 per cent, but only on the portion of the loan between $500,000 and $1 million.
“This marks the fifth time in almost seven years the government has tightened qualifying rules for insured mortgages,” TD Economics noted in the report.
“Following each of the past four rule changes, housing demand slumped for about four to six quarters,” the bank continued.
TD Economics have noted this rule change won’t have an impact of that scale, it will still downwardly affect sales, particularly in Toronto and Vancouver, where average home prices are well above $500,000.
“The lofty activity last year has likely left these two markets more vulnerable to even a gradual increase in interest rates and regulatory rule changes,” the bank explained.
TD Economics expects 93,400 existing homes to change hands in Toronto this year, an 8.3 per cent drop from 2015. During this period, TD predicts Vancouver activity to fall to 39,800 units, a 7.8 per cent year-over-year decline.
Activity in these cities influences national housing market numbers more so than other local markets because they typically have higher sales volumes.
“The new [mortgage rule] changes may also disproportionately impact Calgary, a market that has a higher proportion of first-time homebuyers than most,” TD added.