In Housing-Dependent Canada, Cooling Measures Send Shivers

  • Mortgage stocks slump; bank earnings, growth forecast lower
  • ‘The feds clearly wanted to puncture the housing market’

For almost a decade Canada’s housing market has withstood just about anything that government officials have thrown at it in an attempt to restrain breakneck growth. Measures introduced by Prime Minister Justin Trudeau’s federal government may finally bring it to heel, analysts and economists say.

The fallout from the surprise announcement continued to build on Wednesday as shares of housing stocks tumbled anew, analysts forecast a hit to bank earnings and to an economy that has generated most of its meager growth from housing in recent years.

“The feds clearly wanted to puncture the housing market and they have certainly done so,” Sherry Cooper, chief economist at Port Coquitlam, British Columbia-based mortgage broker Dominion Lending Centers, said in a note to clients. “These measures will provide a tipping point, encouraging those who have been waiting to sell to put their properties on the market post haste. The combination of increased supply and significantly reduced demand will weaken prices everywhere.”

Faith Cracks

The measures unveiled by Finance Minister Bill Morneau on Monday will require mortgages with a down payment of more than 20 percent to face the same eligibility requirement for insurance as those with lower down payments. The government will also close a tax loophole that allowed non-residents to sell their principal homes tax-free. The steps followed a series of similar measures laid down since the 2008 financial crisis, all of which have so far failed to halt steadily rising prices.

In each of the previous moves, from raising down-payment requirements to reducing amortization periods, housing markets barely flinched with the average price of home in Toronto surging 63 percent to C$755,755 ($573,150) in the last five years. With the country’s resource industry in retreat amid the oil-price rout, real estate and financial services now account for about 20 percent of the economy, levels not seen in the data since the early 1960s.

But the faith in housing has started to crack. Shares of Toronto-based Genworth MI Canada Inc. plunged a record 12 percent in two days after the mortgage insurer predicted that over one-third of insured borrowers would struggle to meet the new borrowing standards. Alternative lender First National Financial Corp. has seen almost 20 percent of its value vanish during a three-day slide and mortgage financing firm Equitable Group Inc. has dropped 8.6 percent over two days, the worst slide since 2012.

Earnings Hit

While Canadian bank stocks have held firm, analysts predicted their earnings would also take a hit. Darko Mihelic, at Royal Bank of Canada’s capital markets unit slashed his projection for annual Canadian residential mortgage growth to 2.3 percent, about half the previous average assumed for Canadian banks. He also cut his earnings per share estimates for most of the nation’s largest lenders, including Toronto-Dominion Bank and Bank of Nova Scotia, by 0.9 percent in 2017 and 1.5 percent in 2018.

The moves could push first-time homebuyers into the shadow-banking market, said Gabriel Dechaine, an analyst at Canaccord Genuity Group Inc. in Toronto. Alternative lenders have already doubled their share of the C$1.4 trillion residential mortgage market in the past decade to about 13 percent, according to the finance department.

“While we appreciate the scalpel-like approach of mortgage-market regulation we’ve seen from the government,” and other regulators in recent years, these moves are not without risks, Dechaine said in a note to clients. “Government intervention can have unintended consequences that could make matters worse for certain stakeholders.”

Stunt Growth

For its part, Canada’s finance department projects home sales could fall as much as 8 percent in the first year after new housing regulations are implemented, based on an analysis using historical data. Geoffrey Kwan, an analyst at Royal Bank of Canada, sees a 10 percent decline.

The economy is expected to grow only about 1.2 percent this year, based on a Bloomberg survey of economists. Stuart Kraft, a strategist at National Bank Financial, said the new measures could push growth to below 1 percent.

Canada’s housing market has bounced back before. In 2010, sales fell more than 20 percent from prior year highs before forging higher again. But with Vancouver’s housing market already slowing after the provincial government imposed a 15 percent tax on foreign buyers there, the latest federal measures add another weight.

“Together, these changes are likely to have a material impact on the Canadian housing and mortgage market,” Kwan at RBC said in a note.

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