RBC Economics suggests clipping buying power only hope to cool down housing market amid short supply

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      RBC Economics says that it will take more than an increase in home listings to cool down the hot housing market.

      Bank economist Robert Hogue notes in a new report that even though supply has risen, it is not enough to meet strong demand.

      As a result, the market is expected to remain in favour of sellers, which means continued upward pressure on prices.

      “On its own, the supply response is likely to fall short in the near term given the degree of imbalance in many markets,” Hogue wrote in a housing update Thursday (April 15).

      So what’s left to do?

      Cut demand.

      “Some cooling of demand needs to take place if price gains are to moderate,” Hogue wrote.

      The RBC economist noted that a “gradual rise in longer-term interest rates, deteriorating affordability and the resumption of office work will eventually restrain demand”.

      However, “it’s difficult to know when that will be”.

      "Rapidly-rising prices have also likely opened the door to speculative activity in several markets," Hogue wrote.

      Hogue noted that the Office of the Superintendent of Financial Institutions has proposed to increase the qualifying rate for uninsured mortgages amid concerns about an overheated housing market.

      The measure represents a tightening of rules for borrowers who can afford to put a down payment of 20 percent or more on the price of a home.

      The current qualifying rate is 4.79 percent, and the OSFI wants the rate raised to 5.25 percent.

      The change is expected to be implemented on June 1, 2021.

      Hogue calculated that a new 5.25 percent qualifying rate will “reduce the purchasing budget of some of the most financially-stretched buyers by a little more than 4%”.

      Hogue’s four percent aligns with the same estimate made by Brendon Ogmundson, chief economist with the B.C. Real Estate Association.

      In a previous interview with the Straight, Ogmundson indicated that a four percent cut to purchasing power will “unlikely to have a significant impact” on the market.

      Going back to Hogue, the RBC economist appears to anticipate more tightening on mortgage rules.

      Hogue wrote that a “similar tightening for insured mortgages could be announced in the April 19 federal budget”.

      To explain, insured mortgages are loans by borrowers with down payments of less than 20 percent.

      “Together, these measures would directly dial down the demand heat by a few degrees,” Hogue said.

      Meanwhile, the economist noted that Canada’s composite benchmark price rose another $21,000 or 3.1 percent month-over-month in March 2021.

      The increase was “just shy of the $22,000 (3.3%) increase in February—the largest single-month rise ever recorded”.

      “Relative to a year ago, the benchmark price is up an astounding $120,000, or 20.1%,” Hogue wrote.

      As for housing supply, Hogue noted that sellers “answered the call for more supply in March but, in the end, came well short of rebalancing Canada’s housing market”.

      “Buyers snapped up virtually all new listings, often following highly competitive bidding contests,” Hogue said.