Report: Risk ‘heightened’ for housing market
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.”
Analysts worry rising Canadian home prices are unsustainable long-term.