JOSH BUCHANAN

March 30, 2018

Ever since the Canadian Government and Canadian Central Bank started getting more aggressive with housing policy changes and interest rate increases, sales numbers in Saskatoon have become very volatile. The changes being referred to can be seen in post #140 where they have been summarized chronologically. It’s possible that the changes in interest rates and policies having a strong positive correlation with sales numbers is purely coincidental, however, the timing appears too accurate to ignore. As well, interest rates and mortgage policies would be two of the strongest factors in determining the demand for housing so it makes a lot of sense that these changes would suddenly and significantly impact sales numbers.

Below is a graph showing the numbers of home sales each month in 9-month periods. I’ve used the blue line to graph sales numbers from July 2016 until March 2017 and the red line to graph sales numbers from July 2017 to March 2018 just to show the variation between the two time periods.

You can see that the string of months from November to February were very similar, with an average difference of just 8.1%. However, the month of March has a change of 27%, July – 16%, August – 12%, and September – 12%.

This type of volatility has not been typical in recent years. However, I do believe the changes in interest rates and government policies seem to align quite well with the volatility.

Here’s my breakdown:

Sales numbers up until July 2017 had been quite consistent year-over-year until mid-month. The reason sales suddenly started to plummet is likely due to the interest rate increase that was made on July 14th, 2017 and a second interest rate increase in September which led to a strong downward sales trend until November when sales numbers started to re-align with previous year numbers.

On October 17th, 2017 the OSFI announced the new mortgage stress test that would take effect starting January 1st, 2018. This would significantly reduce the amount that could be borrowed by anyone who had a down payment of 20% or greater. This likely led to many prospective buyers rushing to get approved for mortgages and make purchases before the new policies were in place. This is my guess as to why sales numbers started to recover by November and have stayed strong until the end of February.

This explains the first two significant changes seen in sales. Now, however, it appears as though March has seen the greatest change year-over-year for all of the months plotted above.

A frequent reader of the blog recently pointed out that mortgage pre-approvals have a short expiration date and therefore, anyone who purposely got pre-approved for a mortgage before the new rules came into effect on January 1st will soon be running out of time to make use of their pre-approval terms.

Standard pre-approval lengths seem to last between 60-120 days. This means that anyone who got pre-approved before December 31st would have up until the end of February at the earliest and the end of April at the latest in order to purchase a home under those mortgage conditions without being subject to the new rules implemented on January 1st.

If it’s the case that these new mortgage rules will have an impact on the market, then we should have begun to see a drop in sales beginning in March which should continue through May. So far, January and February of 2018 produced 108% and 92% of sales compared to the same months last year, respectively. However, March appeared to have a huge drop-off, producing just 230 sales which is just 73% of last March’s total of 314.

I’m not going to look at an individual month and jump to any major and definite conclusions but it’s hard to believe that this drop-off in sales was purely coincidental and perhaps things may very well get worse in the coming months as mortgage pre-approvals continue to expire.

I can understand the logic of those who decided to get pre-approved before the new rules came into play. It was probably something like this: “we get to borrow more money if we get approved now compared to if we get approved after January 1st.” However, if that’s their logic, what they failed to miss is the bigger picture and the overall impact of this new mortgage rule on housing prices in the future.

While they probably thought that getting a bigger mortgage was a good thing -and in a sense, it is- the downside is that easy access to large mortgages and low-interest rates are the main culprits for inflating housing prices in Saskatoon in the first place. Now that people are going to have reduced borrowing abilities and will be paying higher interest rates, it means they will have less purchasing power and be less willing to borrow money. This almost guarantees a reduction in sales numbers and almost also guarantees a reduction in sales prices assuming supply doesn’t adjust properly.

As I’ve said before, these people probably think they’re being strategic but I interpret it as: “let’s hurry up and buy now before prices drop.” Get in on those inflated home prices before they go on sale, I guess. I’ve said it multiple times before, but if you want asset value to rise, buy an asset that is scarce and becoming more scarce. If you want asset value to decline, buy one that is abundant and becoming more abundant. These changes in mortgage policies are going to reduce the demand for home sales and make an abundant asset even more abundant.

If the impact of the expiration of these pre-approved mortgages is as big as I think it could be, this spring could be a very significant turning point in the local market. Without having access to the actual statistics of how many people still have pre-approved mortgages, it’s hard to make any kind of prediction based on anything more than opinion and intuition, however, March could be a strong indicator for what’s to come and the next few months could be very interesting to watch.

Josh Buchanan isn’t employed by anyone, is not compensated in any form for this blog and does not benefit in any way from your real estate decisions.