Canadian home prices fell nationally in July

Over the last ten years, home prices across Canada have made some of the biggest gains the world has ever seen in housing, particularly in markets like Toronto and Vancouver. The housing market has been perceived as a hallmark of the Canadian economy, its strength, and all its glory.

However, rising home prices are not a panacea for most Canadians: far too many have decided to use their home's value through financial products like reserve mortgages or a home equity line of credit (HELOC). Millennials who have begun entering the housing market, too, now find themselves carrying massive debt-to-income ratios. It's all been possible through the fountain pen money made available exclusively through Canadian commercial banks, who dominate the mortgage lending market.

Those who haven't entered the housing market and, instead, occupy rented accommodations are finding themselves with massive debt-to-asset ratios. This is because the prices of everything they need seem to be rising around them (especially rentals which are closely linked to factors in housing) but the things they own are increasingly becoming worth less.

Since the summer of 2017, home price growth at the national level has been decelerating. A month ago, we reported how home prices contracted for the first time in almost 10 years. Throughout many Atlantic Canadian and Western Canadian cities, home prices have been falling for a few years. But now, things are really starting to look like the Canadian dream - attainable via asset price inflation in housing -  is beginning to unravel.

On the chart above, we can see that the home price index (black line) in July experienced a 0.39 percent decline from the same time last year. This is the second consecutive month of contraction. Prices briefly dipped into negative territory back in January, but that was a winter month when the housing sales season was quietly asleep. Seeing two consecutive contractions in home prices during the peak of the summer housing sales season is not a good indicator. What's more, we can see that the seasonal bounce in commercial bank residential mortgage credit growth (teal line) from around 3 percent to 3.74 percent has not helped boost home prices. Not good.

So, let's take a closer look at what's going on.

As you can see, there's no visible correlation. Most institutions across the country responsible for housing, including the economists and analysts who work for them, believe that interest rates are a leading cause of home price trends. Unfortunately this is misguided, as interest rates are not significantly correlated with home prices, commercial bank credit is.

On the chart above we can see the growth rate for insured mortgages issued by commercial banks (teal line), which has been lagged by home price growth (black line).

In January 2017, the Office of the Superintendent for Financial Institutions issued a risk-based solvency framework for mortgage issuers, raising the capital requirements for mortgage insurance. Since then, home owners applying for an insured mortgage product must qualify at a higher interest rate in addition to forking over a 5 percent down payment. Rising home prices have made that 5 percent down payment more expensive each year. So, a higher qualifying mortgage assessment adds pressure to that and locks many "high ratio" home buyers (those with debt-to-income of 400 percent or more) out of the market.

Well, judging by the chart above, since the new risk-based solvency framework was introduced, insured mortgage growth has collapsed and began contracting as early as May 2017. This is where the home price growth deceleration started.