posted on 25 November 2015
by Chad Fraser, Investing Daily
Another month, another big jump for Canadian house prices.
According to just-released figures from the Canadian Real Estate Association, average resale prices rose 8.3% in October from a year earlier, to nearly CAD454,976. As always, Vancouver and Toronto led the way, with gains of 15.3% and 10.3%, respectively.
However, two new reports suggest the market's hot streak may be headed for a cool-down, at least in the country's two priciest cities.
The first came from the Organization for Economic Cooperation and Development (OECD), which had pointed words concerning house prices in the country's biggest city on Nov. 9, when it released a report stating that:
However, the organization did note that in Toronto,
Overvaluation, Foreign Buyers Heighten Concerns
A few days before the OECD weighed in, the Canada Mortgage and Housing Corp. released its quarterly survey, saying it had detected moderate signs of overvaluation in 11 of 15 major markets, with strong signs in three: Toronto, Montreal and Ottawa.
But in all, the CMHC said just four markets showed strong evidence of "problematic conditions": Toronto, Saskatoon, Regina and Winnipeg. (The agency bases this judgment on not only overvaluation but also factors like overbuilding and price acceleration.)
Hanging over Canada's real estate concerns is the participation of buyers from outside the country. That can be a plus, as the OECD pointed out, but how these investors would respond to a slowdown is an open question.
CMHC president Evan Siddall said in a Nov. 12 CBC article:
What's more, the size of the foreign contingent is anyone's guess: the government doesn't keep track, though Prime Minister Justin Trudeau promised to look into eroding affordability during the recently completed election campaign: "If there are issues of speculation, then yes, the federal government has the tools to step in," he said in a Sept. 9 CBC article.
A Market Divided
As we said in the June issue of Canadian Edge, it's important to keep in mind that just because a market is overvalued doesn't necessarily mean a quick correction is in the cards, as overvaluation can continue for a long time and isn't always enough on its own to trigger a price drop.
Another thing to note is that the Canadian real estate market is more than a tale of two cities: if you strip Vancouver and Toronto out of the October sales figures, Canadian house prices rose a much more moderate 2.5%, to CAD339,059.
And despite its overvaluation concerns, the CMHC's latest forecast points to a soft landing, with the average price of an existing home rising 7.2% this year but the pace of gains slowing to 1.3% next year and 1.4% in 2017.
That largely jibes with the view of Bank of Canada (BoC) senior deputy governor Carolyn Wilkins.
She told The Globe and Mail on Nov. 13:
Something else that's absent from the Canadian real estate story: large numbers of subprime borrowers. Despite the ongoing rise in home prices, just 0.27% of Canadian mortgages are currently in arrears, according to the Canadian Bankers' Association.
Market Will Be Tested: Economist
Of course, none of this is to say the risk of a Canadian housing correction should be dismissed. Even though there are few signs of a bubble outside Toronto and Vancouver, those two markets are home to about a quarter of Canada's population, so a sharp correction in one or both would have a knock-on effect for the broader economy.
But you have to go beyond the headline numbers, says CIBC deputy chief economist Benjamin Tal.
He said in a Nov. 9 BNN interview.
Tal thinks rising interest rates will be the real test for Canadian housing, particularly following the extended period of low rates the country has experienced. Higher rates could also pose a challenge for consumer spending in the years ahead as Canadians pay more to service their mortgages.
The BoC, for its part, isn't expected to make any upward moves anytime soon, regardless of what the Federal Reserve does (or doesn't do) in December.
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