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When you just look at the strong economy and population growth, a lot more homes should be selling in Toronto right now, recent analysis suggests.

“Sales activity, for both existing and new homes, remains far below where it should be,” writes Will Dunning, an economist whose name appears on numerous reports, including for industry group Mortgage Professionals Canada.

“Given a strong employment situation and population growth at the fastest pace in a generation, sales of new and existing homes should be above-average, not below,” he explains in his recent independent analysis of April home sales.

Ontario employment, which puts money in pockets for home purchases, is on a tear. Some 47,000 jobs were added across the province last month alone, according to the results of Statistics Canada’s Labour Force Survey for April.

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Meantime, the population of the Greater Toronto Area is rapidly swelling with no signs of slowing. The region’s population is expected to reach 9.7 million by 2041, up from 6.4 million, as per the 2016 census.

Why, then, are home sales trending lower than these robust fundamentals would indicate?

“I’ve been pretty blunt about that for a long time — it’s the stress tests, primarily, and partly the rise in interest rates,” Dunning tells Livabl in a followup interview.

In January 2018, federal policymakers expanded stress testing, a process which requires borrowers to prove they can keep up with mortgage payments should interest rates rise.

As a result of the new rules, borrowers who had the necessary minimum 20-percent downpayment for an uninsured mortgage were required to qualify at a rate that was 200 basis points above what they were signing for.

Lending rules were previously more lax for borrowers who could muster 20 percent to sidestep the insured mortgage segment, which already had a stress test in place.

With the qualification hurdle to high for some borrowers, home sales have fallen below expectations, reaching an annualized rate of 77,300 transactions in the first quarter, according to Dunn’s calculations based on Canadian Real Estate Association numbers.

That is the number of homes that should sell in a full year if the current pace of activity persisted after being adjusted for seasonal factors, such as slower winter and summer months.

“This is one- quarter below the level (100,000 to 105,000) that might be expected, based on the long-term relationship between sale activity and population,” says Dunning in his report.

New home sales were also short of what would be anticipated, settling at an annualized rate of 21,700 in Q1, according to Dunning’s analysis of Altus Group data. “The rate should exceed 40,000, to accommodate population growth,” Dunning writes.

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