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Will mortgage and tax rule changes that Canada’s Finance Minister Minister Bill Morneau announced this week do anything to cool the Canadian housing market?
One economic analysis firm says the measures will, so much so that it is declaring the Canadian housing market has peaked.
“Understandably, many are sceptical on the potential for these changes to slow housing,” reads a report from Macquarie Research, noting how despite measures taken since 2008, home prices and borrowing have continued to skyrocket.
“This time, however, is different,” according to Macquarie.
Before Morneau’s announcement this week, policymakers had made numerous sets of regulatory changes over the past eight years, from tighter income verification procedures for mortgage applicants to increasing the minimum down payment on the portion of a mortgage between $500,000 and $1 million.
But there are three reasons the most recent changes — more stringent mortgage stress testing, streamlined requirements for low- and high-ratio mortgages, and the closing of a loophole that allows foreign buyers to flip homes without paying capital gains taxes — will pack more punch than previous measures.
1. The Canadian labour market is weaker today
It partly comes down to the strength — or lack thereof — of labour market.
Between 2010 and 2012, policymakers implemented multiple sweeping macroprudential measures, but these came at a time when the labour market was more robust, Macquarie notes.
In 2016, worker earnings are growing at a clipped year-over-year rate of 1 per cent, tracking below the 2010-2012 average of over 4 per cent, for instance.
2. Falling interest rates eased the pain previously
Then there’s the fact that previous tightening occurred during periods of falling interest rates.
Mortgage rates closely follow the Government of Canada’s five-year bond yield, and that it is unlikely to track lower, says the research firm.
The Bank of Canada cut the overnight rate, which influences mortgage rates, by 25 basis points twice in 2015. The most recent cut in July 2015 set the rate at 0.5 per cent. At the start of 2008, the overnight rate was 4.25 per cent.
3. A provincial government has joined the fray (and another may follow)
“Other arms of the government are eyeing measures to curb foreign investor flows,” says Macquarie, noting another dynamic that wasn’t part of the equation when other tightening measures were implemented.
On August 2nd, the BC government enacted a 15 per cent tax on non-residents buying residential property in Metro Vancouver. This has led at least one leading economist to suggest Toronto must do the same as foreign buyers turn their attention towards Canada’s biggest market.
“The short answer is simply that [Ontario] doesn’t have a choice because everybody else is doing it,” says CIBC Deputy Chief Economist Benjamin Tal tells BNN.
And Vancouver’s municipal government now looks to step up as well. Last month, Vancouver Mayor Gregor Robertson promised to begin taxing homeowners who leave their dwellings empty, rather than rent them out or live in them, next year, CBC reports.