Bank of Canada Interest Rate Announcement – October 19, 2016
The Bank of Canada announced this morning that it is holding its target for the overnight interest rate at 0.5 per cent. In the press release accompanying the decision, the Bank noted that the profile for growth in Canada over the near-term is lower than it previously expected though the Bank is still projecting stronger growth in the second half of 2016. However, the Bank has pushed out its forecast for the economy to return to full capacity to mid-2018 while inflation is projected to return to its 2 per cent target next year.
There is downside risk to the economy given the Federal Government’s decision to tighten mortgage credit this month, though it will take some time to see the effects on economic growth. That said, even if growth moderates as a result of the housing policy changes, the Bank of Canada’s public support for that policy likely means interest rates would not be lowered in response. With growth recovering from a second quarter contraction and inflation still tame, We therefore expect the Bank to leave rates unchanged for the foreseeable future.
Canadian manufacturing sales improved once again in August, rising 0.9 per cent on a monthly basis with broad based gains in 15 of 21 manufacturing sub-sectors. Adjusting for inflation, sales were up 1.2 per cent due to lower prices of some goods.
In BC, where the manufacturing sector employs approximately 170,000 people and is a key driver of economic growth, sales were sharply higher for a second consecutive month, rising 2.1 per cent on a monthly basis and 8.1 per cent year-over-year. The gains continue to reflect a strong rebound in the forestry sector, with shipments of wood products rising at a double digit pace year-over-year. Given strong manufacturing sales in August the BC economy remains on track to expand by a Canada leading 3.5 per cent in 2016
Canadian Housing Starts – October 11, 2016
Canadian housing starts jumped 20 per cent in September to 220,617 total units at a seasonally adjusted annual rate (SAAR). The six-month trend in Canadian housing starts moved moderately higher to just under 200,000 units SAAR, above average annual growth in Canadian households. New home construction will likely slow in coming months as the consequences of government’s new mortgage regulations ripple through the housing market.
Housing starts in BC surged 40 per cent higher to 47,560 in September and were 79 per cent higher on a year-over-year basis. Single detached starts rose 27 per cent compared to last September while multiple unit starts nearly doubled. Through the first three quarters of the year, BC housing starts are up 39 per cent compared to 2015.
Looking at census metropolitan areas (CMA) in BC, total starts in the Vancouver CMA were up 110 per cent year-over-year in September, led by triple digit growth in both single and multiple units. In the Victoria CMA, housing starts tripled compared to September 2015 due to strong growth in new multiple unit starts. New home construction in the Kelowna CMA rose 16 per cent on balanced growth between single and multiple unit starts. Housing starts in the Abbotsford-Mission CMA declined 64 per cent compared to last year as multiple unit projects took a breather in September following several strong months of activity.
Canadian Building Permits – October 6, 2016
The total value of Canadian building permits jumped 10.4 per cent from July to August, with gains largely due to higher construction intentions in the residential sectors of Ontario and British Columbia.
After two straight monthly declines, total permit activity in BC was up 15.9 per cent in August, once again surpassing $1 billion in total value. The gains were almost exclusively due to higher construction intentions for multiple family dwellings. Those gains more than offset a 7.7 per cent monthly decline in non-residential permits. On a year-over-year basis, the dollar value of building permits in the province were up 4.5 per cent.
Construction intentions were higher in most of BC’s four census metropolitan areas (CMA). Permits in the Abbotsford-Mission CMA surged 249 per cent from July to August but were down 7 per cent year-over-year while the Vancouver CMA saw a 15 per cent increase on a monthly basis but a 12 per cent drop year-over-year. In the Kelowna CMA, permits fell 13 per cent from July but were up 67 per cent year-over-year. In Victoria, construction intentions rose 9.3 per cent on a monthly basis, and were 58.5 per cent higher than in August 2015.
The federal government announced regulation changes for new government-backed insured mortgages today. Effective October 17, 2016, insured homebuyers will have to qualify at the posted five-year qualifying rate. Previously, only variable rate mortgages and mortgages with terms less than five years were subject to a higher qualifying rate.
The qualifying rate is updated weekly and available on the Bank of Canada website. The current rate is 4.64 per cent, about 200 basis points higher than the best bank offered rates.
To qualify for mortgage insurance, a homebuyer’s debt servicing ratio must be no higher than:
- Gross Debt Service – 39 per cent of household income, including mortgage payment, taxes, and heating costs.
- Total Debt Service – 44 per cent of household income, including mortgage payment, taxes, heating costs, and all other debt payments
These changes will apply to new mortgage insurance applications received on October 17, 2016 or later. Mortgage insurance applications received after October 2, 2016 and before October 17, 2016 are also not affected by the rule change, provided that the mortgage is funded by March 1, 2017. Homeowners with an existing insured mortgage or those renewing existing insured mortgages aren’t affected by this measure.
These changes also won’t apply to mortgage loans where:
- the lender made a legally binding commitment to make the loan;
- the borrower entered into a legally binding agreement for the property against which the loan is secured.
The federal government is also instituting new eligibility rules for low-ratio (higher than 20 per cent down payment) mortgages backed by government insurance. As of November 30, 2016, to be eligible for government insurance, new mortgages must meet the following requirements:
- A loan whose purpose includes the purchase of a property or subsequent renewal of such a loan;
- A maximum amortization length of 25 years;
- A maximum purchase price below $1,000,000 when the loan is approved;
- For variable-rate loans that allow fluctuations in the amortization period, loan payments that are recalculated at least once every five years to conform to the original amortization schedule;
- A minimum credit score of 600 at the time the loan is approved;
- A maximum Gross Debt Service ratio of 39 per cent and a maximum Total Debt Service ratio of 44 per cent at the time the loan is approved, calculated by applying the greater of the mortgage contract rate or the Bank of Canada conventional five-year fixed posted rate; and,
- A property that will be owner-occupied.
These new criteria, in particular requiring a maximum purchase price below $1 million, will essentially make the majority of single family homes in Metro Vancouver ineligible for government issued insurance for low-ratio mortgages.
The government also announced measures to ensure that the exemption from capital gains tax on the sale of a principal residence is available only in appropriate cases.
Click here for more information on these changes.
(Thanks to the BC Real Estate Association’s Economics department for this analysis.)
B.C.’s tax on foreign home buyers in Metro Vancouver introduced more uncertainty into a market that was already cooling, with international transactions slowing to a trickle in August after hundreds of such buyers rushed to close almost a billion dollars in deals just before the new levy took effect.
The provincial government released new data on Thursday showing just 60 foreign buyers closed sales in and around Vancouver between Aug. 2 and Aug. 31, representing 0.9 per cent of all transactions in the region. In the seven weeks leading up to the tax, foreign buyers accounted for 13.2 per cent of sales in Metro Vancouver. But experts caution this decline is skewed: Many deals slated to complete in August were rushed and were among the more than $850-million worth of Metro Vancouver homes transferred to foreign buyers on July 29, the final business day before the tax was implemented.
Still, industry insiders are worried foreign buyers will stay away from Metro Vancouver and help create a big drop in a market where sales volumes have been falling steadily for several months and the average price of a detached house fell again last month. The province began tracking the nationalities and residency status of buyers in June. The data showed one in 10 homes in the Vancouver region went to foreign buyers, and the government announced an additional 15-per-cent property transfer tax on buyers who are not Canadian citizens or permanent residents.
In its first month, the tax brought in $2.5-million.
Premier Christy Clark said on Thursday she was happy the new levy had slowed foreign home purchases, even though the data cover only a short period. She cautioned that August may have been an unusual month. Ms. Clark has said the new tax would be a success if it created no revenue for the government and cooled off the steep rise in the prices of homes in Metro Vancouver.
“But I think it’s fair to say we’ve had an impact and that’s the impact we wanted to have,” Ms. Clark told reporters at an event in her riding of Kelowna. “My hope is that many of those units that would have otherwise sold to foreign buyers will be open for British Columbians to buy.” But Tom Davidoff, an economist and professor at University of B.C., said if foreign buyers all but disappear – as appears to have happened in August – a decline in prices of at least 25 per cent, and a resulting loss in equity for local owners, could soon hit the housing market in Metro Vancouver, where the benchmark price for a single-family home had risen more than 30 per cent in the past year.
“Politically, going after foreign people isn’t really Profiles in Courage, but to have a major price correction just around election time? That could be tough politically,” he said. “And a tough needle to thread because you have a market that’s predicated on foreign buyers and expectations of more and more and more [price gains].”
Housing prices will be a central issue in B.C.’s election next May, and public pressure from locals priced out of the market forced Ms. Clark to act, but her government has long stated it is proud of the strong real estate sector.
The province will also haul in more tax revenue from the sale of homes this year than all revenues from the B.C.’s historical economic foundation of mining, energy, forestry, Crown land tenures and natural gas. A fiscal update released last week forecasts the property transfer tax will bring in $2.2-billion, a massive increase from the $1.2-billion predicted in the spring budget. Direct revenues from the province’s top five resources are forecast to total $1.8-billion.
Vancouver realtor Steve Saretsky, a blogger who tracks daily sales records published by the local real estate board, said the average price for single-family homes dropped 17 per cent last month compared to the peak prices in January. Data for September show more detached houses are coming onto the market and fewer are selling –which gives buyers more room to bargain, he said.
“August is bad, September is going to be worse,” he said.
Thursday’s data also showed that overall sales of homes in and around Vancouver continue to slow, with 6,964 properties changing hands in August compared to 14,978 over the previous month and a half.
Across the rest of the province, where the tax does not apply, 189 international buyers closed deals on properties totalling $109-million last month, which represented 2.5 per cent of all homes sold in those communities. Foreign buyers on the southern tip of Vancouver Island were involved in a slightly higher share of overall money that changed hands in post-tax transactions. Prof. Davidoff said this hints that such buyers – who typically spend more than locals – are heading to the Victoria region to avoid the tax.
The levy applies to buyers who are not Canadian citizens or permanent residents, and corporations that are either not registered in Canada or are controlled by foreigners, and adds $300,000 to the purchase of a $2-million home. The tax was brought in after the provincial government found foreign citizens who were not permanent residents of Canada bought 10 per cent of Metro Vancouver homes sold from June 10 to July 14.
The foreign-buyer tax applies to the sale of all residential properties within 22 communities in Metro Vancouver. Foreign buyers must indicate their citizenship when they transfer a property’s title.
The Premier said earlier this week that she is confident the tax can withstand a potential class-action lawsuit filed by a local Chinese woman who is unable to pay the levy on a townhouse she agreed to buy before the tax was announced.
On Thursday, the Finance Ministry said its auditors are still reviewing all transactions from August to validate whether buyers declaring themselves to be locals can prove their Canadian citizenship or permanent residency status.
Earlier this year, B.C.’s Liberal government rejected a bill tabled by the opposition New Democrats aimed at taxing foreign capital – not citizenship – tied up in housing. That bill called for increased property taxes for home owners who do not pay income tax in British Columbia.
Jeremy Kronick is a senior policy analyst at the C.D. Howe Institute.
Last week, a new tax introduced by the B.C. government came into effect with the goal of slowing down the unrelenting increases in Vancouver-area house prices. The additional 15-per-cent transfer tax specifically targets foreign nationals looking to buy real estate.
We must ask whether it will meet its stated objective of making Vancouver housing more affordable for the so-called middle class and, perhaps more important, what are its unintended consequences?
Whether or not Vancouver housing prices fall – or their increase moderates – as a result of this tax depends on a host of factors. There are many different possible reactions by foreign buyers.
I’ll focus on three possible scenarios.
In the first, foreign buyers accept the higher tax as the cost of doing business, leading to little or no change in sales volumes, though with likely decreases to property values. In this case, the government now has additional tax revenue to spend on increasing the supply of housing and related infrastructure. This is the golden scenario for the B.C. government and the public, though not necessarily for current homeowners.
In the second scenario, foreigners adjust and spend more on a lower value part of the housing market. Before the tax change, B.C. residents payed a 1-per-cent tax on the first $200,000 worth of their real estate purchase, 2 per cent on the remaining value between $200,000 and $2-million and 3 per cent above $2-million. So a jump to 15 per cent is significant. However, if assuggested, the bulk of Vancouver purchases by foreigners are in this luxury market, i.e. above $2-million, they may simply readjust where they spend in Vancouver.
What does this mean? If foreign nationals continue to believe Vancouver real estate is a good investment, they may move into the cheaper portion of the market between $200,000 and $2-million, and deal with the additional, though lower – at least in absolute terms – cost of the tax. If this occurs, there may be little housing affordability relief as some relatively more affordable housing increases in price, and tax revenues are lower than expected.
In the final scenario, and one that is concerning to Torontonians and perhaps many other Ontarians, the capital foreign buyers earmarked for Vancouver’s housing market simply shifts location. There are many examples, including in Toronto, of increased land transfer taxes causing depressed sales volumes, which suggests that people are sensitive to this form of tax increase and will look to park their money in lower tax areas. Should the effect of this tax cause a shift in capital eastward, house prices will surely rise further in Toronto on account of increased demand. What happens then?
The Ontario government can choose to not raise the current transfer tax, allowing house prices to continue to increase. The hope for the government in this case is that the 10 per cent of real estate purchases in Vancouver made by foreign nationals are not those simply looking to avoid scrutiny at home. The hope would be that the 10 per cent includes at least some immigrants who are on their way to becoming citizens but are not there yet, or are foreign parents purchasing homes for their student children causing them to be more likely to stay after graduation – generally a good thing for an economy.
If Ontario does choose to follow in Vancouver’s footsteps, foreign nationals could again accept the tax, giving the Ontario government more tax revenue to spend on policies boosting housing supply, should it so wish. Or they could readjust their spending patterns to lower-value homes, potentially causing reduced affordability for houses below the luxury price range. It would be Vancouver’s story all over again.
However, what is concerning is what happens if capital leaves completely.
Foreigners have many other options for investment. If foreigners start to worry about taxes hurting their return on investment in Canada, they will be more likely to spend in other countries. And while this may be a good thing for the overheated housing markets in Vancouver and Toronto, it may not be for Canada in general. Canada remains very dependent on foreign capital to finance its current account deficit of $62-billion a year, or 3.5 per cent of gross domestic product. We should beware the risk we run of reducing this flow by making foreign capital less welcome.
At the end of the day, the impact of the tax on foreign housing purchases in Vancouver remains to be seen. Perhaps it will work out exactly as planned in that city. However, what is playing out in Vancouver could well have unintended consequences across the country, not all of them happy.