Canada home prices to keep rising despite economic slowdown

by REP31 Aug 2015
By Anu Bararia

(Reuters) - Canadian home prices are set to rise a little over 5 percent this year and 2 percent in 2016 despite a slowdown in activity as the economy weakens, a Reuters poll found.

Canada's economy shrank in the first three months of the year and quite possibly between April-June as well owing in part to slumping oil prices. House prices have defied this weakness so far and have kept climbing.

The Reuters survey of over 20 analysts predicted home prices would rise 5.2 percent this year, up sharply from a forecast of 3.4 percent in June's survey.

The latest expectations for 2016 and 2017 have also been revised upwards, to 2.0 and 2.3 percent from 1.3 and 1.7 percent respectively. Canada's Teranet-National Bank House Price Index was up 1.2 percent in July.

Calling the Canadian housing market "bullet-proof", 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 went in the opposite direction to 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 fueled by cheap debt, but 13 of 19 respondents said the housing market remained affordable - at least on a national basis, because low interest rates have kept debt service costs under control.

The Bank of Canada estimates the housing market is about 30 percent overvalued and has said it poses a significant risk to consumers overexposed to mortgage debt, especially in the oil-extraction part of the country where last year's oil price shock and persistent weakness has hit the job market hard.

In July, the Bank brought its benchmark interest rates down to 0.50 percent to dull the sting of plummeting oil prices and prevent a housing market crash.

But that rate cut likely has fueled further house price rises in the already-stretched cities of 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 there are vast amounts of new supply still being built.

Some analysts fear a risk of correction, but particularly in these two urban markets, 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," Moodys' Hopkins 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 and average around 180,000 units.


(Polling by Anu Bararia; Editing by Ross Finley and W Simon)
 

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