PPS Realty asks, Does government intervention help to stabilize the real estate market or not?
After a 2016 heat up, followed by a dramatic slowdown in 2017 with Realtors and the public frustration on the governments, Ali Salarian, Real Estate Broker and Analyst at PPS Realty has clarified the role of the Canadian federal and provincial governments in the real estate market.
His take is that the problem originates from international crude oil price. Although the
Canadian economy’s dependency on oil and gas revenues never exceeded 10% of the total GDP, it has had significant impact on the Canadian currency historically. Canadian crude oil which is mostly exported to US is in USD, so a higher oil price means a higher supply of USD into Canada, resulting into a higher value of CAD against USD.
The Bank of Canada had to significantly decrease the interest rate following the 2008 global recession and the drop of oil below $US 30 per barrel in order to depreciate the Canadian currency and increase export for competitiveness in the global market. This led to a local supply of cheaper money by lenders and thus encouraged Real estate borrowers to benefit from cheaper mortgages. The decline trend of the interest rate reached a low of 25bps in 2010, leading to increasing demand of properties. Real estate transactions in the following years then jacked up prices to a historical high in 2016.
In 2017, as oil price exceeded $US60 per barrel, the current government revised the fiscal policy by increasing the interest rate to 125 bps. A simple arithmetic adjustment of the interest rate against the oil price would show an interest rate of 200 bps if the oil price continues to stay above $US60 per barrel for the next two years. This means while prime interest rate will be above 4%, the mortgage rate will start from 5%. That has motivated the Bank of Canada to apply the mandatory mortgage stress test rules of additional 200bps since Jan. 2018 to prepare for further increase of mortgage rate and ensure mortgage borrowers’ ability to service debts.
Ontario and British Columbia had no choice than to deploy strategies to slow down their domestic real estate markets. We have an obligation to assist our government to improve our policies and adopt our real estate transactions based on the current situation.
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Press Release by: Nasdaq News Wire