by Ephraim Vecina17 Apr 2018

The most affordable segments of Canada’s housing market are seeing the biggest price hikes as recent changes to mortgage regulations fuel demand for lower-priced homes such as condominiums, according to the Canadian Real Estate Association.

The tighter mortgage lending rules, which have made it harder for home buyers to qualify for uninsured mortgages, are also shrinking the pool of qualified buyers for higher-priced homes, CREA chief economist Gregory Klump told The Canadian Press.

“Given their limited supply, the shift of demand into lower price segments is causing those sale prices to climb,” Klump stated. “As a result, ‘affordably priced’ homes are becoming less affordable while mortgage financing for higher priced homes remains out of reach of many aspiring move-up home buyers.”

Royal LePage CEO Phil Soper said the new stress test for uninsured mortgages has disrupted the flow of move-up home buyers looking to upgrade from their entry level home or move to a more desirable location.

“That cycle has been interrupted with the OSFI stress test, because it impacts the ability to move up,” Soper explained. “The question is, is it temporary, or will it actually take demand out of the market permanently? I believe it’s temporary.”

Home sales across the country have dropped in the wake of several government policy measures, including a stress test for home buyers with a down payment of more than 20%, that were implemented to cool the country’s hot housing market.

The number of Canadian homes sold in March plunged 23% and the national average price was down 10% from the same month last year amid double-digit plunges in most housing markets across the country. CREA said the level of sales activity marked a four-year low for the month of March and was 7% below the 10-year average.

Read more: Millennial demand, economic strength continue to push prices upward – report

Sales prices are slipping too, with the national average price for all types of residential property down to about $491,000, down 10.4% from March of last year, with the Vancouver and Toronto markets causing most of the drag.

Excluding Canada’s two most expensive real estate markets, the national average price would be $383,000, representing a 2% decline from March 2017.

But a closer look at the different housing segments reveals a mixed landscape, with lower-priced homes showing the largest gains.

Apartment units posted the largest year-on-year price gains in March, up 17.8%, followed by townhouse/row units at 9.4%. One-storey single family homes saw price gains in March of just 1.3%, and two-storey single family home prices were down 2% from a year ago, CREA said.

“The housing market continues to adjust to stricter mortgage rules, recent Bank of Canada rate hikes, and some provincial policy moves,” BMO Capital Markets’ senior economist Robert Kavcic wrote in a research note last week. “While we’re seeing some signs of stability, the adjustment likely has some time yet to go.”