Over the past decade the residential real estate market was red hot. Particularly in Toronto and Vancouver.
The main reason was affordability. With historically low interest rates more people were able to qualify for significant mortgage loans.
The extra demand for homes due to low interest rates caused house prices to escalate. This was a concern for the government for two reasons.
It wanted to slow down the quickly escalating real estate prices to avoid creating an overpriced residential real estate market. Overpriced markets tend to come crashing down and that would have a negative ripple effect on the Canadian economy.
The other reason was to protect individuals from getting in over their heads financially. If interest rates increased and homeowners had to renew their expiring mortgages, would they be able to pay more every month in mortgage payments caused by higher interest rates?
The real estate stress test was successful. According to the Canadian Real Estate Association (CREA), home sales declined 11 per cent in 2018, and the Toronto Real Estate Board (TREB) recorded a 2018 residential sales decline of 16 percent.
House prices have stabilized and in some markets declined.
Evan Siddall, President and CEO of Canada Mortgage Housing Corporation (CMHC) recently defended the government’s action to attempt to slow down the real estate market. In a letter to the House of Commons finance committee, now posted on the CMHC website, he said the “potential consequences of our debt-fueled real estate boom in Canada are serious” and the mortgage stress test “is doing what it is supposed to do.”
Civil associations representing groups involved with the real estate market have protested against the clampdown on prospective home buyers. Those groups represent homebuilders, real estate agents and mortgage brokers.
From a financial planning perspective, individuals who have too much exposure to real estate can suffer significant financial setbacks. I strongly support the government action.