House price trends cooling, report finds

‘Several years of retrenchment’ forecast

TORONTO • Single-family house prices may be overvalued by as much as 60 per cent in Toronto, but cooling measures may take a bigger bite out of markets away from the country’s largest metro area, says a new report.

Moody’s Analytics maintains the brakes are being put on the housing market across the country and Canadians need to prepare for “several years of retrenchment” with at most a 1.3-per-cent annual price growth per year over the next half a decade.

“Exact turning points are difficult to predict, but the combination of restricted mortgage lending, taxes on foreign purchases in the largest metro areas, and the expectation of higher mortgage rates means that house prices are likely to experience a slowdown in the next few years, especially if speculative home purchases in Toronto and Vancouver are reduced or shut down,” says Andres Carbacho-Burgos in the report released Tuesday.

In the past two months, the Bank of Canada has raised the overnight lending rate 50 basis points, while the prime lending rate at most financial institutions has jumped from 2.7 per cent to 3.2 per cent. Long-term rates have also been trending upward, and some suggest the central bank is not done and will raise rates another 25 basis points in October.

“Affordability as measured by the median dwelling price to median family income ratio is also close to a record low, so it is hard to see house prices maintaining the same momentum as before,” the Moody’s report states.

Consumers with insured loans backed by Ottawa have faced tougher lending restrictions for about the past year but the Office of the Superintendent of Financial Institutions is now looking into cracking down on noninsured mortgage loans, the portion of the market with 20 per cent or more equity in their own.

Moody’s Analytics does say the effects of tougher lending standards, higher mortgage rates and policy interventions from provincial governments will make reactions uneven across the country.

“Greater Toronto is likely to maintain moderate house price growth, while the more policy-restricted market in Vancouver will lead to prices holding steady in coming years,” the report says. “Although inflows of wealth and real estate speculation get most of the blame for increased overvaluation and reduced housing affordability in Toronto and Vancouver, excess demand is a more permanent culprit,” Moody’s said. “Household formations in Toronto and Vancouver, as well as in Toronto’s satellite metro areas like Guelph and Oshawa, have exceeded the national rate of household formation for some years now, and residential construction in these two metro areas has failed to keep up.”

In the census metro area for Toronto, Moody’s said it can see average annualized price growth of 10.7 per cent from the third quarter of 2017 to second quarter of 2018. It sees an another 8.5 per cent of annualized growth from third quarter of 2018 to the second quarter of 2019.

The Vancouver census area picture is not as rosy with annualized price increase from the third quarter of 2017 to the second quarter of 2018 of only 1.1 per cent. The following year will see prices drop 1.7 per cent in the Vancouver area.

Moody’s composite house index says national prices will rise 6.8 per cent in 2017, but drop 0.1 per cent in 2018, rise one per cent in 2019 and then 1.3 per cent per year for 2020, 2021 and 2022.

The report suggests Toronto has not been left unscathed by regulatory and interest rate changes, but has withstood the moves better than the national market.