As Consumer Confidence Prepares To Take Another Hit, Basic Economics Will Prevail

The housing market in Toronto is poised for major long-term price growth as booming demand and inadequate supply overwhelm recent policy efforts to cool the market, according to a new report from economist Benjamin Tal.

Mr. Tal, deputy chief economist at CIBC World Markets Inc., said home sales in Toronto will flatten or even soften in the next year but the slowdown will be limited by strong demand.

Let’s look at the reasons why: the fundamentals.

The recently announced Qualifying Rate (2% higher than the Contract Rate) Stress Test to all NON-INSURED mortgages, is intended to put a brake on overstretched buyers who would be vulnerable as rates rise. It’s impact on the housing market remains to be seen as it is set to take effect January 1st, 2018. The outlook as reported by the news media is grim. However, what few people realize is that the big banks were already applying this practice when qualifying new mortgages; the difference, come January 1, is that it will be mandated.

“The fundamentals are way too strong offsetting all of that. Those fundamentals not only will prevent a dramatic decline, but will lead to a strong increase from a long-term perspective over the next five to 10 years,” Mr. Tal said.

What are the fundamentals:

  • Future demand for new housing is being underestimated by policy makers, while supply is growing more slowly than anticipated.
  • Many people will find ways around the rule changes by extending the amortization period on their mortgage to reduce payments, by opting for variable-rate mortgages or by using exceptions allowed for people with significant assets; others will turn to non-bank lenders because they are not covered by OSFI’s banking regulations.
  • Ontario’s Places to Grow Act, which sets out land-use planning and development rules for the Toronto region up to 2031, is running seven to 10 years behind schedule in terms of the anticipated release of land for development; supply cannot keep up with demand. 23 per cent of that land is at the stage in which development applications are in process; the other 77 per cent is not remotely close to being designated or approved. At this rate, much of that land will take years to find its way to the market.

As we’ve seen in recent months, consumers will no doubt have an emotional, knee-jerk reaction to the change. At first, they may sit back and wait to see how it all plays out. What we will come to realize after some time, is that it is all business as usual.