Despite the shrink in Canada’s economy earlier this year, housing prices are expected to continue to rise. A Reuters survey of over 20 analysts predicted that Canadian home prices are expected to rise 5.2% this year, a higher forecast than 3.4% in June’s survey. This revision raised expectations for 2016 from 1.3 to 2.0% and for 2017 from 1.7 to 2.3%. Chief economist at HSBC, David Watt, along with the majority of analysts, predicts that home purchases will slow down due to these price increases, despite two rate reductions by the Bank of Canada this year.
Fear of Correction
The Canadian housing market remained resilient throughout the global financial crisis and US market crash. While home prices in the US are beginning to recover, Canada’s home prices seem to be unaffected. Some analysts warn of potential correction in the market, particularly in Toronto and Vancouver, once the US Federal Reserve begins to tighten policy, which will increase Canadian mortgage rates. The Bank of Canada estimates the housing market is about 30% overvalued, posing a significant risk to consumers overexposed to mortgage debt.
Although home prices are considered to have remained affordable on a national basis, the prices in Toronto and Vancouver have surpassed affordability limits of the average Canadian homebuyer, outside the condominium sector. The Bank of Canada’s rate cut in July brought its benchmark interest down to 0.50% to dull the impact of crashing oil prices, but this likely fueled further rise in house prices in urban markets.