Ask Peggy: “Are skyrocketing Ottawa housing prices expected to balance out or come down?”

Allan asks: “Are skyrocketing housing prices in Ottawa expected to balance out or come down? How long would it take for a trend like that to be felt?”

To answer that question, it’s important to understand the reason behind the recent climb, which in my view, is the result  of changes the federal government made to the mortgage stress test, starting two years ago. This is the test applied to make sure that buyers can afford to carry their debt load.

Originally, the  federal mortgage rules were changed to make it harder for first time buyers to borrow money by making it harder for them to quality. Last year those rules were expanded to apply to everyone. Everyone now has to qualify for a mortgage rate that is two points higher than what their bank has offered them, or two points above prime, whichever is higher. That’s reduced people’s capacity to borrow by about 20%, which is a lot.

Stay with me: I know this is counter-intuitive, but the effect of the mortgage stress test, at least in Ottawa, which had a good inventory of affordable housing two years ago, has been dramatic.  It’s shifted us from a buyer’s market into a seller’s market, and fast.

As part of the financing changes, lenders now loan money based on income alone. Before, they would consider equity. So for a lot of retired and semi-retired folks with lots of equity in their homes but lower incomes, it’s now a lot harder for them to borrow as well. (TD is now treating secured home lines of credit  as being fully expensed, even if they have a zero balance, which is again making it tough for a lot of home owners to borrow money. I expect other lenders to follow suit.)

A few years ago, those home-owners were able to draw on the equity in their homes to “bridge finance,” i.e. to arrange short term loans that allowed them to buy a new home before they sold the one they were living in. With the new rules, that’s a lot harder. Bridge financing only applies when their homes have sold firm. That means that to be able to finance a new purchase, in most cases,  they’d have to sell their home  first, which poses the risk of them selling and not being able to find a new home. Most people don’t want to do that, particularly not when inventory is down, because they’re afraid they won’t be able to find something they like or that they could end up homeless.

So homes that would normally be hitting the market  are not coming on-stream which means inventory is very low. (As one long time realtor said to me, “it’s getting spooky.”) How low? Well, down 40% from before the changes. It’s not unusual now to see only a handful of new listings on a given day in a city of almost a million people, at a time when 100-200 new listings would be average.

First time buyers have also found it harder to borrow money under the new mortgage rules, particularly if they are self-employed. More of them are renting while they save up larger down payments. That’s driving up the price of lower priced freehold and condo units which are more affordable but also more rent-able for investors. With a roughly  1.7% rental vacancy rate in Ottawa, down from 6-7% a couple of years ago, rents are way up. As a result, a lot of homes priced under $ 400K  are being snapped up by investors, because they are cash flow positive, which places upward pressure on property values in that price range.

Condos, which had stagnated in value over the past seven or eight years, are finally selling, for the same reason: they tend to be more affordable. (This is not the case across the board, however. Those with really high condo fees, though, are still hard to move as are luxury properties, again, because of affordability issues.)

So, to answer your question, Allan, I don’t think that much will change until the lenders can be more flexible so I don’t expect to see those prices level off or go down any time soon.

The federal government imposed these new mortgage restrictions because of overheated markets in Toronto and Vancouver, even though those markets were already showing signs of cooling off on their own. As long as they can continue to claim that their efforts have allowed us to achieve a “soft landing” from a housing collapse (highly debatable), I think they will stick to their guns, although there is some talk about making housing more affordable for first time buyers. So far, however, the efforts to do so have had an opposite effect in Ottawa.

One thing I should also note is that with the imposition of foreign buyer taxes in both the GTA and Vancouver in the last couple of years,  foreign buyers have shifted to Ottawa and Montreal. It’s very common now to have multiple offers where a good number of the offers received are cash offers from foreign buyers. And that wasn’t the case a few years ago.

How long does it take to detect a trend? Well, here is a graph called the MLS Home Price Index which shows housing price trends in Central Ottawa. It kind of speaks for itself

You can see that most of the upward momentum started in 2017, concurrent with the first introduction of the new rules on first time buyers and then really took off in 2018, when the rules were made to apply to everyone. So, while I wish I had better news, I think that low inventory and skyrocketing prices in Ottawa will be with us for the foreseeable future.




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