Canada’s homeownership rate will likely decline in the coming years, thanks to continued eroding affordability in expensive markets, especially Toronto and Vancouver, says Capital Economics.

The declining rate will also be affected by recent interest rate hikes and impending stricter mortgage regulations, according to the global economic research firm’s note, published last week.

“The homeownership rate has peaked. It looks like it’s already in decline and obviously going forward higher buying costs and tighter regulations will continue to put downward pressure on the homeownership rate,” David Madani, Capital Economics’ Senior Canada Economist, tells BuzzBuzzNews.

According to the firm, which is known to be notoriously bearish on the Canadian housing market, the country’s “housing bubble” has been prolonged thanks to previous Bank of Canada interest rate cuts, lower bond yields, easing credit terms and growth in the unregulated shadow banking industry, but “this has only delayed the day of reckoning.”

Capital Economics points to the latest 2016 Census to support its forecast, which says the national homeownership rate is already showing signs of declining.

The falling rate is partly attributed to the nation’s most largest and expensive markets, Toronto and Vancouver.

With home prices increasing in those markets, so do the potential barriers to homeownership among younger households, says Capital Economics.

Senior VP of Market Research and Analytics at Fortress Real Developments Ben Myers agrees that the homeownership rate could fall in the years ahead, primarily because of poor affordability in Canada’s major cities.

By observing the homeownership rate of other big housing markets worldwide, Myers says this might provide valuable insight into how Toronto and Vancouver’s rates could unfold.

“All you need to do is look at New York and London and see what their ownership rates are. I think they’re somewhere in the range of 40 to 50%. The majority of people are renting in those markets just for the fact that they’re so expensive,” Myers tells BuzzBuzzNews.

Along with high housing costs, Capital Economics notes that the Office of the Superintendents of Financial Institutions’ (OSFI) new stress test could further depress the homeownership rate.

On January 1st, all uninsured mortgage borrowers will be required to qualify against the Bank of Canada’s five-year benchmark rate, or at their contract mortgage rate plus an additional 2%.

According to Capital Economics, these new mortgage regulations, along with increased rate hikes, could precipitate declines in house prices, shrinking wealth and reduced spending. In turn, this could cause homeownership rates to decrease.

“When prices are falling, like they are now, housing tends to lose its investment appeal reducing the desire of younger people to rush into homeownership,” says Madani.

With less households owning their dwellings and opting to rent, Myers says this could have a wider impact on the economy.

“If the ownership rate goes down, there’s a little bit less of that spin off spending and value created through that process,” says Myers.

There is some hope that more households will decide to buy again.

Madani says the homeownership rate seems to follow the housing cycle, and if it does, the rate could come around full circle.

“Several years from now, once the housing cycle has completely bottomed out, then the homeownership rate might begin to rise again, particularly as house prices begin to increase again,” says Madani.

Will Toronto & Vancouver Drive A Drop in Canada’s Homeownership Rate? by Kerrisa Wilson | Buzz Buzz Home