Re­port: Risk ‘height­ened’ for hous­ing mar­ket

The Peterborough Examiner - - BUSINESS - GARRY MARR FI­NAN­CIAL POST gmarr@post­media.com

TORONTO — The boom­ing Cana­dian hous­ing mar­ket is com­ing un­der scru­tiny in an­other re­port, this time from FitchRat­ings, which said Thurs­day the coun­try’s res­i­den­tial hous­ing is over­val­ued and at height­ened risk of a cor­rec­tion.

“Low rates and for­eign in­vest­ment con­tinue to fuel price rises in sev­eral key mar­kets in 2016. The av­er­age home price in Canada in­creased year-on-year by 12 per cent through Oc­to­ber, pri­mar­ily driven by growth in the Toronto and Van­cou­ver mar­kets, which have in­creased ap­prox­i­mately 16 per cent and 25 per cent, re­spec­tively since 2014,” says the Toron­to­based rat­ings agency.

Fitch’s call comes af­ter Bank of Mon­treal econ­o­mist Doug Porter said Wed­nes­day the Toronto mar­ket is now in bub­ble ter­ri­tory af­ter a 22 per cent in­crease in prices in Jan­uary from a year ago. Cap­i­tal Eco­nom­ics has also ques­tioned the long-term im­pact de­pen­dence on hous­ing could have for the over­all econ­omy.

Fitch said such ris­ing prices are un­sus­tain­able in the long-term and not sup­ported by fun­da­men­tals. “There is a height­ened risk of a price cor­rec­tion in over-val­ued mar­kets. With lo­cal and fed­eral gov­ern­ments tight­en­ing loan el­i­gi­bil­ity re­quire­ments and im­pos­ing re­stric­tions on cer­tain buy­ing seg­ments, the pace of home price growth should de­cel­er­ate,” it said in the re­port.

Ottawa has tight­ened the rules around loans that are backed by the fed­eral gov­ern­ment, forc­ing con­sumers to qual­ify based on the Bank of Canada posted fiveyear fixed mort­gage rate, which is now 4.64 per cent. That rate, much higher than the rate on most con­tracts, is ex­pected to hit first-time buy­ers hard be­cause they will find it tougher to qual­ify.

Fitch also raised con­cerns about af­ford­abil­ity, which is be­ing funded by record debt lev­els. “House­hold debt reached a new high of al­most 168 per cent of dis­pos­able in­come in (the se­cond quar­ter of 2016) and breached 100 per cent of GDP. This is the first time that house­hold debt has ex­ceeded the size of the Cana­dian econ­omy and is higher than the U.K. and U.S. house­hold debt bur­den. Mort­gage debt is the num­ber one con­trib­u­tor to house­hold debt in Canada,” the rat­ings agency said.

It noted that higher down pay­ment re­quire­ments, tougher un­der­writ­ing stan­dards and the pos­si­bil­ity of lender risk-shar­ing ar­range­ments should help sta­bi­lize the hous­ing mar­ket and im­prove af­ford­abil­ity, even if it means higher mort­gage costs.

“The cu­mu­la­tive ef­fect of th­ese chang­ing dy­nam­ics on home prices is likely to be neg­a­tive, but is yet to be de­ter­mined as th­ese steps are un­prece­dented,” the re­port goes on. “It is too soon to de­ter­mine the im­pact of the new mort­gage rules and the risk shar­ing pro­gram has just en­tered the con­sul­ta­tion phase; how­ever, we ex­pect that it will re­sult in fewer loans be­ing made avail­able to mar­ginal bor­row­ers, which could re­duce loan growth. That said, we an­tic­i­pate loan vol­umes to re­main near his­tor­i­cal highs as long as in­ter­est rates re­main low, em­ploy­ment is sta­ble, bor­row­ers are able to qual­ify un­der the stricter mort­gage rules, and the de­sire/de­mand for home own­er­ship re­mains high.”

POST­MEDIA FILES

An­a­lysts worry ris­ing Cana­dian home prices are un­sus­tain­able long-term.

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