HOUSING MARKET NOT HEADED FOR A MAJOR CORRECTION.
But stress tests may prove a problem, adds Moody’s Analytics
Barrie, Ont., and Regina, Sask., may not leap to mind as the most likely locales for short-term house price corrections in Canada, but that’s what Moody’s Analytics is predicting in a new report being released Wednesday.
“The largest corrections will be in those metro areas that have a combination of recent house price declines, high overvaluation and slower projected income growth,” according to the report from the research arm of Moody’s Corp. “Barrie and Regina lead the list.”
Moody’s Analytics, which operates separately and independently from ratings agency Moody’s Investors Service, projected median singlefamily home price growth (or contraction) over the coming year based on year-to-date figures.
Overall, the report projects a fairly stable Canadian housing market with no major short-term correction over the next five years. In markets where there are house price increases, those are expected to continue to moderate, and could be offset by higher income.
“Median family income growth will have a good chance of keeping up with and even outpacing house prices in coming years, improving affordability,” the report says.
Moody’s Analytics predicts interest rates will rise through 2020, which could push mortgage rates back up to around six per cent from the current five-year rate of around 4.4 per cent. But the absence of “significant” house price declines should reduce the risk of mortgage debt “deteriorating” over the period, the report concludes.
Such credit quality is an important consideration for lenders and their regulators.
A downside risk highlighted in the report is the potential for higher mortgage rates to combine with policies and borrower “stress tests” aimed at tamping down demand in hot markets such as Toronto and Vancouver to “push down demand in the Atlantic and Prairie Provinces.” The report says this could lead to “a full house-price correction and a perceptible drop in sales in these regions.”
The Moody’s Analytics report noted some regional differences that are already apparent in Canada’s housing market. For example, mortgage delinquency rates in Alberta, Saskatchewan, and the Atlantic Provinces are “significantly” higher than the national average, with higher incomes in British Columbia and Ontario leading to substantially lower delinquency rates in those provinces.
Single-family homes in Toronto and Vancouver are still trending very high when it comes to valuation, according to the report. However, this has improved “perceptibly” since mid-2016 when the first restrictive buying policies were introduced in the Vancouver market.
Moody’s Analytics said a risk to its baseline outlook for the Canadian housing market is that stress tests for conventional borrowers with 20-per-cent down payments — imposed this year by banking regulator the Office of the Superintendent of Banking Institutions — may be “too strong.”
The potential downside is reduced purchase demand that weighs not only on home values, but also on the balance sheets of real estate developers and residential construction businesses.
“(B)y trying to tamp down a housing bubble, OSFI could actually add perceptively to the drag on Canada’s GDP growth,” the report said.
“Conversely, the new stress tests could result in a serious reshuffling of mortgage lending as potential buyers shift from banks toward credit unions and other non-bank mortgage lenders that are not regulated by OSFI.”
The latter outcome could result in the stress test being less effective than hoped in reducing home purchases and prices, and set the stage for “a worsening of mortgage debt performance several years down the road,” the report said.