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Canada home prices not coming down yet thanks to low rates: Reuters poll
May 25, 2017 / 7:15 PM / 2 months ago

Canada home prices not coming down yet thanks to low rates: Reuters poll

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Construction workers build homes on a lot in Vaughan, a suburb with an active real estate market, in Toronto, Canada, May 24, 2017.Mark Blinch

(Reuters) - Efforts to rein in Toronto's hot housing market and recent problems at mortgage lender Home Capital are unlikely to hurt Canada's national real estate market as low borrowing costs continue to stoke demand, according to a Reuters poll of analysts.

Matching British Columbia's move last year for Vancouver, Ontario's provincial government introduced a 15 percent tax on property purchases by foreign buyers in Toronto in April as part of 16 measures to cool the property market.

Prices in the two markets have increased at double-digit rates, driven by cheap credit and speculation, and sparking concerns of a housing bubble.

Analysts polled said that although Ontario's measures will cool activity in Toronto and its surrounding areas, the effect will be modest and temporary.

"Low interest rates are going to be oxygen ... that keeps the fire going in the Toronto and BC housing markets - and that fire has spread to southern Ontario as well," said Sal Guatieri, senior economist at BMO Capital Markets.

"Clearly, without such low interest rates, we probably would not be seeing house prices rising as dramatically as they are."

A weaker Canadian dollar, which has dropped 24 percent since the 2014 drop in oil prices, is also offsetting policy changes both in Vancouver and Toronto by making prices look relatively cheap to some foreign investors, Guatieri said.

Prices Jump

The Bank of Canada has kept interest rates at 0.50 percent since 2015, when it lowered them to offset tumbling oil prices. Earlier this week, the central bank said government measures to rein in the housing market have not yet had a substantial cooling effect.

Despite multiple steps taken by the federal and provincial governments, prices in Canada have nearly doubled over the past decade and are expected to climb 9 percent this year. That's the biggest expected jump since polling for 2017 began two years ago and stronger than the 4.7 percent forecast in February's poll.

House price inflation is estimated to cool to 3.0 percent in 2018, against 3.5 percent expected earlier.

Prices in Toronto and Vancouver are likely to climb 13 and 5 percent respectively this year, versus 9.5 and 2 percent forecast three months ago.

Asked about the risk of a sharp correction, more than half of the analysts said it was somewhat or very likely in Toronto and Vancouver but unlikely nationally.

"The Vancouver and Toronto markets are particularly vulnerable to an economic shock, given their high prices and household debt levels relative to household income," said Robert Hogue, senior economist at Royal Bank of Canada.

However, the pace of homebuilding nationally could bring some respite. Housing starts are predicted to average 204,300 per quarter this year, up from 185,300 expected in February.

Home Capital

Recent problems at mortgage lender Home Capital, Canada's biggest non-bank lender, are unlikely to affect investors' confidence in the Canadian mortgage market, analysts surveyed said.

Depositors have withdrawn more than 90 percent of funds from Home Capital's high interest savings accounts since March 27, when the company terminated the employment of former Chief Executive Martin Reid.

Withdrawals accelerated after April 19, when Canada's biggest securities regulator, the Ontario Securities Commission, accused Home Capital of making misleading statements to investors about its mortgage underwriting business. The company has said the accusations are without merit.

The average Canadian household owed C$1.67 ($1.24) for every dollar of disposable income in the fourth quarter, mainly in the mortgage market. With rates unlikely to rise for another year, borrowings could spike further.

Respondents also said that if U.S. President Donald Trump acts on protectionist threats and makes substantial changes to the North American Free Trade Agreement, that could hurt the Canadian property market through broader damage to the economy. [CA/POLL]

Canada sends about three-quarters of its exports south of the border.

"If we do see heavy-handed protectionist measures from the U.S., that could curb Canadian exports and tip the economy into a recession. It will clearly pose a significant risk to the Toronto and Vancouver housing markets," Guatieri said.

($1 = 1.3429 Canadian dollars)

Polling by Kailash Bathija; Editing by Bernadette Baum

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