Transcript: The Housing Market: When the Fog Clears

The Housing Market: When the Fog Clears
Length 2:50

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Benjamin Tal, Deputy Chief Economist, CIBC World Markets

In 2018, the Canadian housing market will be tested. We are going to experience two things happening. First, interest rates will be rising, although not to the sky, they will be rising. Much more important is the fact that the government is going to implement the qualification rate change that is going to be very important in terms of the psyche of consumers. We are going to see roughly 8, 9 percent of demand being taken away from the market because of the increased qualification rate in which the five year rate would be qualified 200 basis points higher than it is now. That's significant, that will reduce demand and that will be the real test of the housing market in 2018 especially in places like Toronto and Vancouver. 

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The problem is housing supply

The main issue in all markets, especially Vancouver and Toronto, is not really demand it's supply. We simply don't have enough supply and we have seen a situation in Vancouver, and recently in Toronto that when you don't deal with the real issue which is supply the fix is temporary. You don't really fix it on a permanent basis and that's why Vancouver is recovering and Toronto is starting to recover. Yes we will be tested again during the course of 2018 because of those changes. But the story is that there is not enough supply in the market and therefore those markets over the next 5, 10 years will become even less affordable unless we change policies and we introduce the rental element in the market, basically an option for home buyers to rent or to buy apartments. We simply don't have enough supply and that's the number one issue facing those two markets.

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Increase in private lending

If you look at the overall situation one important change is going to be the rise of private lending because what the government is doing now is basically regulating banks. So basically banks are unable to touch new immigrants, self-employed, and now they have to qualify people at 200 basis points higher than the ongoing rate. This means that many people who cannot qualify to those loans basically have to go somewhere else. This somewhere else is the private segment of the market, MICs, mortgage investment corporations. They are seeing already their business is 10 percent of total mortgages in the country. I think it will rise to about 15 percent. So we are transferring risk from the regulated segment of the market to the unregulated segment of the market. That's not an optimal situation.

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