Photo: James Bombales

While new government policies have appeared to dampen the Canadian housing market this month, one bank says that the “one-two punch” of the new mortgage stress test and interest rate hike won’t keep things cool for long.

“[The changes] merely supply body blows to the housing market, and will not knock-down the market. Indeed, after some weaknesses this year and into early-2019, nationwide activity looks to stabilize,” write TD economists Michael Dolega and Rishi Sondhi, in a note released today.

On January 1, a new mortgage stress test was introduced for uninsured borrowers, while on January 17 the Bank of Canada hiked the overnight rate 25 basis points to 1.25 per cent.

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But according to Dolega and Sondhi, changes to mortgage rules have historically had only a temporary effect on the housing market.

“In the past when we’ve seen mortgage rule tightening, it’s only had a transitory effect on the market,” Sondhi tells BuzzBuzzNews. “The market feels it in the short run, but then eventually adjusts to its effects.”

According to Sondhi, some Canadian markets will take the change harder than others, at least for a little while.

“When you look at markets like Toronto and Vancouver, where prices are higher, the effect of the new rules and the interest rate hike will of course be greater in the short term,” says Sondhi. “But simultaneously, the market conditions in those markets are strong enough that they will eventually rebound, and demand will spur prices higher.”

Meanwhile, other more historically affordable markets are likely to remain relatively unchanged.

“The outlook is comparatively favourable for the Maritime provinces, where good affordability will limit the impact of higher rates and updated B20 regulation, while continued immigration bolsters demand,” write Dolega and Sondhi.

Sondhi says that it’s important remember that while interest rates are on the rise, they’re still historically low.

“There will of course be some weakness caused by a higher interest rate environment,” Sondhi tells BuzzBuzzNews. “But these increases are moderate enough that the market will be able to adjust to them without too much turbulence.”

Dolega and Sondhi continue to predict a soft landing for the Canadian housing market in 2018.

“We remain of the view that weakness will manifest as a continuation of the soft landing that has been taking place in Canada’s housing market recently,” they write. “Ultimately, we expect declining sales and flat prices this year before activity improves somewhat in 2019.”

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