Photo: James Bombales

There’s no denying that the Canadian housing market has seen a steep drop off in activity in 2018. The new stress test, rising interest rates, and foreign buyer taxes in Toronto and Vancouver have led to a plunge in year-over-year sales.

And, according to one economist, the cumulative effect of these changes may have been greater than the government initially intended.

“Canada’s housing market is challenged by two parallel developments,” writes RBC Global Asset Management chief economist Eric Lascelles, in a recent note. “One is the fact that the rising yield environment is logically translating into higher mortgage rates…The other big change has been the regulatory crackdown on housing.”

Lascelles writes that a combination of national and regional rule changes have “altered the equation significantly.” He notes that, since the stress test has been implemented, the value of home resales in Canada has fallen by 28 per cent.

“While this is disproportionately Toronto (down nearly 50 per cent since its peak), it is also Newfoundland (down 31 per cent), British Columbia (down 30 per cent), Alberta (down 23 per cent), Saskatchewan (down 18 per cent) and a host of other provinces,” he writes. “Quebec gets off quite lightly, but it is also down (if by only 3 per cent).”
According to Lascelles, this drop in activity may be more than the government had bargained for.

“The hit to housing has likely been larger than the government initially expected,” he writes. “Whether this is merely an adjustment process or represents the beginning of a more sustained cooling remains a matter of guesswork.”

He’s quick to add that quality-adjusted home prices have managed to hold up relatively well, which means there likely isn’t a crash looming on the horizon. But he does predict that the housing market could start to weigh on Canada’s economy moving forward.

“Canada’s housing market has undeniably lost some of its spark and this could drag on economic growth going forward,” he writes.

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