Ratings agency sounds strong warning on Canadian housing market

Ratings agency sounds strong warning on Canadian housing market

Ratings agency sounds strong warning on Canadian housing market

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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  • MBS Quant 2017-02-23 11:33:05 AM
    There are three potential triggers to precipitate a crash: One is efforts by foreign governments, particularly China, to limit outflows. These efforts are unlikely to have a serious impact, as wealthy individuals will likely retain avenues for moving funds, particularly through corporate accounts. The second trigger is policy change in Canada that makes foreign buying less attractive, such as the 15% tax in BC where the downward impact on prices was almost immediate. Other such policy changes could include increased transparency on ownership, making the offshoring of international money in Canadian real estate a riskier maneuver. The third trigger is interest rates. Canada has a fairly short duration mortgage market, where most borrowers have to renegotiate a mortgage after 5 years (folks, look closely, it is NOT automatic that your bank will re-mortgage your house). Compared to the US where many borrowers have 30-year mortgages and much less debt, Canadian borrowers are in a particularly vulnerable position relative to US borrowers as interest rates increase. Given the inflationary policies of the new US President, significantly higher rates are not an unreasonable possibility.

    My sense is that triggers #2 and #3 combined in significant but realistic amounts would cause a crash in Toronto and Vancouver, and to some extent the spill over areas from those places, that would dwarf the US crash both in terms of severity and duration. Prices in those areas could easily fall 50% within 6-12 months and remain depressed for a decade or more. The rest of Canada would be collateral damage, but not nearly to the same extent, and in some places remain relatively unaffected.
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