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Thread: Canada house prices poised to surge again despite central bank warning

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    Default Canada house prices poised to surge again despite central bank warning

    Canada house prices poised to surge again despite central bank warning

    Nov 25, 2021

    REUTERS [OTTAWA] Canadian housing prices are set to surge again in the coming months as investors and first-time buyers scramble to buy before interest rates go up, ignoring a warning from the Bank of Canada that there is a high risk of a sudden price drop.

    Central bank Deputy Governor Paul Beaudry told would-be home buyers on Tuesday to consider if it is a "good time to buy or not," pointing to market frothiness in certain cities and renewed investor activity.

    Those conditions could "expose the market to a higher chance of a correction," he said.

    The Bank of Canada last month signaled the overnight rate, currently at a record low 0.25 per cent, could start rising in the "middle quarters" of 2022. Another rush to buy is probably already under way, analysts said.

    "Whenever interest rates start rising, people get into the market, including investors. So you will see an acceleration in activity over the next few months," said Benjamin Tal, deputy chief economist at CIBC Capital Markets.

    Canadian house prices skyrocketed 31.6 per cent year-over-year in March to hit a record high before softening a bit over the summer. Prices are now accelerating again, with October's average price barely below the March peak.

    Ratings agencies are taking notice. Fitch has pegged Toronto's housing market at 32 per cent overvalued and Vancouver's at 23 per cent. Moody's Analytics also has Vancouver 23 per cent overvalued, Toronto 40 per cent and Hamilton, Ontario, 73 per cent.

    The average price of a home in Toronto, Canada's biggest city, hit C$1.2 million (S$1.3 million) in October, up 19.3 per cent from the previous year, and detached homes now average C$1.5 million.

    Canadian Prime Minister Justin Trudeau has pledged to act on the runaway market, but critics note prices have climbed 77 per cent nationwide since he took office in 2015.

    Toronto mortgage broker Ron Butler says he is getting busier by the hour with clients desperate to get into the market.

    "We see it, literally, hourly here ... people who have simply given up and say: 'The prices are going to go up forever, I have to buy now,'" he said.

    Butler said he is working with one longtime Toronto renter who has been waiting years for prices to fall so he could get into the market. Now he is buying an hour's drive west in Hamilton because he is worried he will never own a home otherwise.

    Fear "is not a good motivator when you're buying a house,"said Butler, adding that investors too are increasingly gripped by the "fear of missing out," or FOMO.

    'RUSH TO BEAT RATE HIKES'

    Butler estimates that investors - those who buy properties to rent out or to hold for speculative gains - make up about 25 per cent of housing demand at this point, with that number far higher in major cities and particularly in pre-sale condo markets.

    The Bank of Canada said investor buying has doubled since the onset of the Covid-19 pandemic, but economists see demand holding up.

    "We don't expect a collapse. But we see prices being close to flat next year," said Jimmy Jean, chief economist at Desjardins Group in Montreal, adding that demand is expected to remain "pretty decent," pointing to strong immigration.

    Doug Porter, chief economist at BMO Capital Markets, also expects a short-term "rush to beat rate hikes," but then only a moderate pullback in markets that were supercharged by the pandemic.

    "The history of the last 15 years has been cluttered with those calling for a crash in the Canadian housing market to be proved wrong time and time again," Porter said.

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    Default Re: Canada house prices poised to surge again despite central bank warning

    Bank of Canada says investor rush into housing risks correction

    This comes on the heels of one of the biggest upswings in Canadian housing ever this year

    Nov 25, 2021

    Ottawa

    BLOOMBERG - THE Bank of Canada is warning a rush of investors into the country's housing market this year has fuelled prices and heightened the risk of a correction.

    In a virtual speech on Tuesday (Nov 23) to discuss financial stability issues, Deputy Governor Paul Beaudry said risks around the housing market have intensified following a boom in prices that appear to be driven by speculative activity.

    The number of new mortgages held by investors has doubled over the past year, while those taken on by repeat homebuyers is up by more than 60 per cent, showed a chart in prepared remarks provided to reporters.

    "A sudden influx of investors in the housing market likely contributed to the rapid price increases we saw earlier this year," Beaudry said in a speech to the Ontario Securities Commission. "That can expose the market to a higher chance of a correction."

    The higher prices, meanwhile, are forcing some households to take on extremely high levels of debt, adding to the risks that could emerge from a correction.

    "The damage can spread far beyond the investors," he said. "That's because, for many households, their wealth and access to low-cost credit are tied to the value of their home."

    The comments come on the heels of one of the biggest upswings in Canadian housing ever this year, with prices climbing almost 40 per cent nationally over the past 2 years.

    The growing investor activity, coupled by rising prices, is part of a "worrisome development" that has seen activity in the market driven by "extrapolative" expectations that prices will continue to increase, Beaudry said.

    "Extrapolative expectations risk creating a disconnect between actual home prices and their more fundamental levels," he said.

    One factor that could push demand for homes even higher is the resurgence in immigration, he said. Canada's borders were closed for most of the pandemic and only recently opened.

    Every 6 months, the Bank of Canada provides analysis around financial stability. That includes a full report - typically in May - that outlines the central bank's thinking on risks and can seem like a laundry list of concerns, followed by a speech at the end of the year.

    How this analysis plays into the central bank's policy decisions is unclear. Growing household vulnerabilities could give policy makers more reason to consider raising borrowing costs, for example, though higher rates would also inflate risks - such as slow growth or a housing price correction. Beaudry didn't spell out implications.

    Other "significant" vulnerabilities cited in Beaudry's speech includes the risks associated with high household debt levels, and mispricing climate risks that can leave businesses exposed to sudden losses due to the transition to a low-carbon economy.

    While focusing on risks, he also pointed out the nation's financial system would remain resilient even in the face of a major shock.

    He underscored how the system has held up throughout the pandemic, helped by policy support that has kept household insolvencies and corporate bankruptcies low.

    Yet, he warned the share of highly indebted households is rising and will likely have more than reversed recent improvement earlier in the pandemic.

    "The takeaway is that, overall, vulnerabilities linked to elevated household debt appear to be rising again after a slight pause," he said.

    On climate change, Beaudry said the Bank of Canada has been working "to sort out all the ways that climate-related risks could affect the financial system and economy over time".

    That includes scenario analyses that appear to confirm that delaying transition "carries a significant economic cost in the form of greater damage to homes, businesses and infrastructure".

    "Action that comes with a delay would need to be more abrupt than otherwise to achieve the same goal," he said. "

    That would mean a more difficult transition. It also could make a sudden repricing of carbon-intensive assets more likely."

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