House sales fell in a majority of markets across Canada in June, suggesting the real estate sector is cooling just as interest rates are starting to climb and Ottawa is proposing tougher mortgage qualification rules.
Sales fell in Toronto and most nearby cities throughout southern Ontario in June compared to the same month last year, but were also down in an array of markets outside Ontario, including major markets in British Columbia.
Data from the Canadian Real Estate Association shows sales fell in 16 of 26 major markets across the country in June on a year-over-year basis, as well as on a monthly basis compared to May. The total number of homes sold nationally fell 6.7 per cent in June compared to May -- the largest monthly decline since 2010 -- and were down 11.4 per cent compared to June last year.
The slowdown is coming as the Bank of Canada moved last week to increase its key overnight rate for the first time in seven years, raising interest rates to 0.75 per cent from 0.5 per cent. That move came a week after the federal banking regulator, the Office of the Superintendent of Financial Institutions, announced a proposal to toughen mortgage rules this fall by requiring lenders to ensure home buyers could still qualify for uninsured mortgages even if interest rates were two percentage points higher than the offered rate.
The proposals have raised concerns that real estate markets could face a greater correction if interest rates rise further this fall, especially in Greater Toronto Area communities that already faced a significant drop in sales and prices in May and June following the Ontario government’s introduction of a package of reforms to cool the housing market.
CREA chief economist Gregory Klump said the Ontario housing policy changes have clearly prompted many home buyers in the GTA “to take a step back” and assess the market.
“The recent increase in interest rates could reinforce a lack of urgency to purchase or, alternatively, move some buyers off the sidelines before their pre-approved mortgage rate expires,” he said in a statement.
Alex Ocsai, a realtor in the town of Milton west of Toronto, anticipates many people sitting on the fence will start shopping before interest rates rise further, which could provide a boost to sales activity this fall.
“I think the threat of rates going up will bring people away from the sidelines and into the market,” said Mr. Ocsai, who owns Royal LePage Meadowtowne Realty in Milton. “Rates haven’t moved for a long time, so we think right now people are on the sidelines towards the end of the summer waiting to see what will happen, and I think the threat of a rate increase will bring those people out of the woodwork.”
Mr. Ocsai said sales fell 18 per cent in Milton in June compared to a year earlier as new listings spiked, which he believes is the result of many investors and speculators leaving the market.
“We have seen a lot of investors and as much of our share of speculation as anyone else, and it looks like those people are gone,” he said.
The Greater Toronto Area led the national decline in June, with the number of homes sold falling by 38 per cent compared to a year earlier, while numerous other Ontario cities also posted declines in June. Sales fell 23 per cent in Hamilton-Burlington, for example, and 23 per cent in the Niagara region.
Sales also dropped in B.C. in June, with Greater Vancouver seeing 12 per cent fewer sales compared to June last year, while sales fell 13.6 per cent in Victoria and almost 10 per cent in the Fraser Valley region. Regina saw 32 per cent fewer homes sold in June, while sales fell 11.5 per cent in Gatineau and 15.5 per cent in Newfoundland and Labrador.
Toronto Dominion Bank economist Diana Petramala said the national housing market is in its third month of what is expected to be a “soft landing,” with the downturn triggered by changes to provincial and federal housing policies. Toronto in particular has now moved from sellers’ territory to buyers’ territory based on the ratio of available listings to sales in June, she said.
Ms. Petramala said last week’s interest rate increase will help “solidify” the downturn, and mortgage rates will continue to edge higher, predicting there will be three more interest rate increases by the end of 2018. TD forecasts house prices nationally will fall by 2.1 per cent in 2018.
“Much of that weakness will be concentrated in markets in Ontario and B.C., where households are particularly sensitive to higher mortgage rates given the stretched affordability,” Ms. Petramala said in a research report Monday. “Elsewhere in the country, the improving economic conditions should help offset some of the impact of gradual interest rate hikes, with home prices and sales expected to trend higher.”