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My Mortgage Blog
We are living in strange times, economically speaking. Mortgage stress tests have slowed the housing market and may be one of the reasons the Bank of Canada has signaled it may pause on increasing interest rates.

Home sales fell sharply in Canada last year -- the largest annual decline since 2008, spurring predictions the country could face stagnant sales in 2019.  The decline was due in large part to slowing activity in British Columbia and in the Greater Toronto Area, both hit hard by new government measures and higher interest rates. 

The Canadian Real Estate Association has forecast little improvement in 2019, predicting 0.5% growth in national sales this year, over 2018.
Christopher Alexander, regional director for Re/Max in Ontario and Atlantic Canada, said the mortgage stress test has been the biggest factor keeping buyers out of the market, especially in Vancouver and Toronto.

"It’s a lot harder to get a mortgage now than it has been for the last 10 years," he said. "Not only do you have the stress test, but the big banks are very particular in their criteria. It just seems that everybody is being very cautious."

However, there are variations across the country. The average price of all homes sold in the Greater Toronto Area fell 3.4% in 2018, for example, while the average price climbed 3.7% in Ottawa and 5.8% in Montreal.

Bank of Montreal economist Robert Kavcic predicts little change in national sales totals or prices in 2019. He suggested the the housing market is going into a period of stagnation.

A Bigger Picture
Recently Statistics Canada released its third-quarter report on national wealth, which is the "value of non-financial assets in the Canadian economy." Total national wealth hit $11.415 trillion in the third quarter, and at $8.752 trillion, real estate made up a 76% share of that figure. That was the highest that both figures had been, going back to the second quarter of 2007.

Data from both Canada and the US shows that real estate as a share of U.S. national wealth in 2007 was 75.3%, compared to 67.6% in Canada. That started to change with the 2008 recession when US real estate as a share of national wealth started to decline while in Canada real estate wealth started to grow.
BMO has estimated that Canadian benchmark home prices will grow by less than one per cent next year and two per cent in 2020, dragged by "tougher mortgage rules and higher interest rates so the share should continue to trend modestly lower."

Economists have mixed feeling about this trend. Some say a flat housing market is not anything to worry about. Others, like CIBC’s Benjamin Tal said the Canadian housing market is more important to the overall economy than at any other time on record. Aalthough the Bank of Canada (BoC) argues that the worst is now behind us, and that housing markets are stabilizing, some economists find it difficult to agree.

The BoC's workhorse model says that six quarters can pass before a rate hike can be felt in the economy but according to Tal and others, only five quarters have passed since the first move of this cycle and "we’re already seeing a slowdown in housing-related indicators." 

The Global Economy
There are growing fears about a worldwide economic slowdown.  Uncertainty with tariffs, ongoing trade wars, and even the US government shutdown (over for now) is all having a negative impact on the global economy as a whole. 

The International Monetary Fund (IMF) downgraded its expectations for the global economy, highlighting sharp declines in Europe and warning that the risks of a major slowdown have increased.

Already, at the annual World Economic Forum being held in Davos, Switzerland, there is worry about the global economy. Absent from the Forum is representation from the US. French President Emanuel Macron stayed home to deal with ongoing domestic issues. British Prime Minister Theresa May is home, desperately trying to eke out a bipartisan deal for Brexit.

In the United States, the shutdown has cut into growth. Early this month, consumer confidence slumped to the lowest level of Trump’s presidency, according to the University of Michigan’s consumer sentiment survey.

While few see a recession as imminent, the number of risks is growing. As an economy slows, it’s easier for it to be knocked off track, many economists say.

 "After two years of solid expansion, the world economy is growing more slowly than expected and risks are rising," said Christine Lagarde, managing director of the International Monetary Fund in an interview in the Globe & Mail. "Does that mean a global recession is around the corner? No. But the risk of a sharper decline in global growth has certainly increased."

Chief executives ranked a global recession as their No. 1 concern for 2019, according to a survey of nearly 800 top business leaders around the world. 
A survey of 1,300 chief executives released by PwC found that 30%  of business leaders believe that global growth will decline in the next 12 months, a record jump in pessimism to about six times the number who said that last year.

What happens now?
The "R" word has been bandied about lately. In economics, a recession is a business cycle contraction, a general slowdown in economic activity. Economic indicators such as GDP, employment, investment spending, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise. While we are living in a slowdown, we are not seeing high job losses or increases in bankruptcies.

There is also some optimism. In a blog by TMG’s David Larock, he writes that core inflation has not increased and five-year fixed rates continue to settle in at slightly lower levels. Variable rates are holding steady. 

It’s a matter of waiting this through, as Canadians did in 2008. There may be an upside -- this projected slow period means buyers can take their time searching for a house and not worry about missing out on a sale. 

As always, Canadians are a resilient bunch – this is just one more challenge they will overcome.



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