Friday, August 28, 2015
Canadian home prices predicted to rise despite economic uncertainty
ANU BARARIA Reuters |The Globe and Mail| Aug. 26, 2015
Canadian home prices are expected to rise a more than 5 per cent this year and 2 per cent in 2016 even as the economy weakens, a Reuters poll has found.
Canada’s economy shrank in the first three months of the year and it may have in the second quarter as well, owing in part to slumping oil prices. But house prices have defied this weakness so far and have kept climbing.
The Reuters survey of more than 20 analysts predicted home prices would rise 5.2 per cent this year, up sharply from a forecast of 3.4 per cent in June’s survey.
The latest expectations for 2016 and 2017 have also been revised upward, to 2.0 and 2.3 per cent from 1.3 and 1.7 per cent respectively. Canada’s Teranet-National Bank House Price Index was up 1.2 per cent in July.
Calling the Canadian housing market “bulletproof,” Mark Hopkins, senior economist at Moody’s Analytics said: “It seems to not only be defying the odds in terms of surviving the large downturn in the global economy, but even now with gross domestic product contracting, it seems as though existing home prices have accelerated, which is a bit strange and counterintuitive.”
A majority of analysts predict a slowdown in home buying despite two rate reductions by the Bank of Canada this year.
“Even though the Bank of Canada is lowering rates, we are going to see a slowdown starting as people find that it is more expensive to buy stuff, and the home renovation activity will begin to slow down,” said David Watt, chief economist at HSBC.
In recent years, the housing market has been an important driver of the Canadian economy. It largely remained strong throughout the U.S. housing market crash and helped Canada brave the worst of the global financial crisis.
While home prices in the United States have begun to recover, in Canada they have been rising unabated ever since and several economists – although not a majority – have long warned of potential correction.
Average home prices have doubled over the past decade fuelled by cheap debt, but 13 of 19 respondents said the housing market remains affordable – at least on a national basis, because low interest rates have kept debt-servicing costs under control.
The Bank of Canada estimates the housing market is about 30-per-cent overvalued and has said it poses a significant risk to consumers overexposed to mortgage debt, especially in regions of the country where last year’s oil-price shock and persistent weakness has hit the job market hard.
In July, the Bank of Canada brought its benchmark interest rates down to 0.50 per cent to dull the sting of plummeting oil prices and reduce the chances of a housing market crash.
But that rate cut likely has fuelled further house price rises in Toronto and Vancouver. Poll respondents said both these urban markets have surpassed affordability limits of the average Canadian homebuyer, outside of the condominium sector, where vast amounts of new supply are being built.
Some analysts fear a risk of correction – particularly in Toronto and Vancouver – once the U.S. Federal Reserve begins to tighten policy this year, which may take Canadian mortgage rates higher.
“The [Fed] rate hike is clearly going to have an impact on the [Canadian] housing market. That’s guaranteed,” Mr. Hopkins of Moody’s said. “But as long as the Fed continues to be the cautious agent that it is now in moving very slowly, I don’t think there will be any surprises.”
The Reuters poll also showed home building in Canada is expected to remain robust over the next year, averaging around 180,000 units.