Price management measures might lead to major trouble down the line

by Ephraim Vecina on 04 Oct 2018

Well-intentioned measures to stem outsized price growth might inadvertently steer Canadian housing markets towards dire straits, according to a Moody’s Analytics expert.

“Given that most of the [recent] house price increases took place in Toronto and Vancouver, there is still the downside risk that higher mortgage rates and the borrower stress tests could push down demand in the Atlantic and Prairie provinces,” Moody’s economist Andrew Carbacho-Burgos said, as quoted by The Globe and Mail.

“[These policies] may prove too strong and may precipitate not just a house price correction, but also an extended decline in sales and possibly a reduction in home ownership,” he added.

Indeed, Moody’s already adjusted its expectations for annualized housing price growth in Canada’s single-family segment, from 3% last May down to 1.5% in its latest analysis.

Read more: Was government intervention a good thing?

BMO chief economist Douglas Porter said that the volume of recent borrowing nationwide supported this observation.

“The slowdown in credit – most notably, overall mortgages – syncs well with the broader cooling in housing market activity,” Porter explained. “The biggest chill has been in mortgage growth (not surprisingly), which has softened to a 3.6% year-over-year clip from an average growth rate of about 6% in the past two years.”

“We are on the cusp of seeing the slowest growth in mortgage balances outstanding since the early 1980s.”

The concerns aired by the Moody’s report mirrored statements made by BMO Capital Markets senior economist Robert Kavcic last month. Kavcic warned that these factors working in concert would be detrimental to both sales activity and general interest in home ownership.

“We are going to see very modest price growth across all markets,” Kavcic said. “We are seeing Toronto and Vancouver still adjusting to past policy measures and Bank of Canada rate hikes.”

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