In its report released last week, Fitch Ratings downgraded its outlook of the Canadian housing market to “unsustainable”.
The credit rating agency’s latest survey of 22 countries placed Canada among the ranks of Greece and Singapore as the real estate markets facing the greatest risk of major downturns in the near future, BNN reported.
“Canadian home prices are not supported by underlying fundamentals and the risk of a price fall in over-valued markets has risen,” Fitch stated.
And the trend of consistent price growth, especially in overheated Toronto and Vancouver, should not be taken as an indication of long-term market health.
“Despite the continued rise, Fitch views current home prices as unsustainable in the long term. There is a heightened risk of a price correction in over-valued markets,” the report explained. “With local and federal governments tightening loan-eligibility requirements and imposing restrictions on certain buying segments, the pace of home-price growth should decelerate.”
“We expect that [stricter mortgage rules] 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, [and] employment is stable.”
Earlier this month, veteran markets analyst Chris MacDonald argued that the real estate sector is not immune to a crash similar to—or even worse than—that experienced by the United States nearly a decade ago.
“Many Canadians I’ve spoken to love to point the finger at their U.S. counterparts, noting that it was largely hubris that drove the financial crisis of 2007/08,” MacDonald said. “[But] if you were to pick two countries in the world that were the most similar, it would be hard to find two markets that resembled each other more on a fundamental level.”
“The reality is, right now, the household debt levels of Canadians are much worse than those in the U.S. before the housing crash,” he added. “High levels of foreign investment in Canada’s real estate market mean that a significant percentage of loans made with Canadian banks could be reneged on should the foreign investors stand to lose more than their down payments, making the potential for a ‘cascading waterfall’ of foreclosures similar to what happened in the U.S. much more likely.”
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