Bank of Canada Puts Price Tag on Morneau Housing Measures

The Bank of Canada, which has expressed worries about vulnerabilities posed by high household and elevated real estate prices, has put a price tag on the recent measures to rein in the market.

In the release of its quarterly Monetary Policy Report on Wednesday, the central bank estimated changes announced by Finance Minister Bill Morneau on Oct. 3 would reduce housing’s contribution to growth over the next two years and leave the economy 0.3 percent smaller than it otherwise would have been by the end of 2018. That’s worth more than C$6 billion ($4.6 billion) in lost income.

The bank cut its forecast for how much housing would add to growth in 2016 by one tick, to 0.2 percentage points, and projects housing will be an outright drag on the economy in 2017. Monetary policy makers now expect housing to shave 0.2 percentage points off GDP growth next year, relative to the July forecast for the sector to serve as a marginal tailwind to economic activity.

Lower housing turnover and softer residential investment will have “spillover effects to income and consumption,” the bank’s Governing Council wrote in the report. The measures include a requirement that new mortgages be stress-tested to ensure the homebuyer can make payments at a higher interest rate, as well as the closure of a tax loophole that benefited foreign buyers of real estate.

There are two ways the changes could affect buyer behavior.

Stress Test

They could entice developers to produce smaller units, because families can afford “less house” in light of mortgage stress test. Otherwise, prices could fall as households are not able to obtain as much credit.

Morneau’s changes also may reduce the “wealth effect” that’s buoyed Canadian consumption, whereby strong home price appreciation makes households feel richer and boost spending, should the rate at which home prices rise deteriorate meaningfully or turn negative. With employment in real estate at elevated levels, a reduction in resale activity could also lead to job losses that further reduce consumption.

While the Finance Minister’s measures were introduced primarily in response to the parabolic surge in Vancouver and Toronto real estate values, critics have noted that the changes will have a damping effect nationally — crimping activity and in many cities in which the real estate market is already relatively soft.

The central bank observed that the slowdown in Vancouver resales that began in May “intensified” in August, but said construction and sales activity in Toronto remain “robust.”

The bank employed model projections and data from previous rounds of macroprudential measure to produce this estimate. Previous episodes in which mortgage rules were altered only induced a temporary slowing in resale activity.

The measures should bolster the health of the real estate market however over the longer term by improving the credit quality among new buyers, the bank said.

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