LDN - Business

Rising Canadian home prices make new regulations more likely

[February 24, 2017] By Leah Schnurr and Anu Bararia

OTTAWA/BENGALURU (Reuters) - Low borrowing costs and hot demand in key urban centers will keep pushing Canadian house prices higher this year, a Reuters poll showed, pressuring policymakers to take further steps to rein in a market that more experts are calling a bubble.

Most economists polled said there was a risk of a sharp correction in Toronto and Vancouver, two of the country's most expensive markets, though they were divided on the likelihood that Canada as a whole would see a painful pullback.

While Canada avoided the worst of the housing crash that hit the United States a decade ago, prices have risen nearly in a straight line since, nearly doubling, raising worries consumers have taken on too much debt and are at risk if prices drop.

Despite steps taken by policymakers in recent years, 13 out of 20 economists thought it likely local or federal governments will introduce new regulations in the next six months.

Still, the upswing is expected to continue, the poll showed.

Nationally, home prices are expected to rise by a median 4.7 percent this year, the highest pace since polling for 2017 began two years ago and stronger than the 1.8 percent that was forecast in the last poll done in December.

Prices are seen rising 3.5 percent in 2018, up from the previously expected 2.0 percent, and 2.8 percent in 2019. Expectations for 2018 are the highest since polling began last year.

"There's no doubt interest rates are feeding cheap credit to homebuyers. But there's also an element of increased investment in the market, both domestic and foreign," said Sal Guatieri, senior economist at BMO Capital Markets.

He added that immigration from other countries and provinces is also supporting prices.

BMO recently said Toronto and nearby cities that have seen prices rise in tandem are in a housing bubble.

That sentiment was echoed by Sun Life Global Investments' Chief Investment Officer Sadiq Adatia, who told BNN news channel on Wednesday there is a housing bubble in Toronto as well as one in Vancouver, which Adatia said had already started to burst.

While Vancouver prices came off their peak last year as the province implemented a tax on foreign buyers in the city, Toronto prices have kept climbing despite tighter mortgage lending rules put in place across the country by the federal government in late 2016.

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A real estate for sale sign is pictured in front of a home in Vancouver, British Columbia, Canada, September 22, 2016. REUTERS/Ben Nelms/File Photo

In Toronto, prices are expected to climb 9.5 percent, up from the previous 6.0 percent forecast, the poll showed. Eleven of 19 economists said a correction in Toronto was somewhat or very likely.

"We were expecting Toronto's market to cool down in response to the new federal home financing rules but so far there's little evidence of that playing out," said Guatieri.

In Vancouver, prices are forecast to rise 2.0 percent, rather than the 1.8 percent decrease that was expected in the last poll. The risk of a correction was greater for Vancouver, with 15 saying it was somewhat or very likely. Just three economists said it was not likely.

Economists were nearly split on whether Canada's overall housing market would see a correction, with 11 saying it was not likely and 10 saying it was somewhat or very likely.

With low interest rates and limited supply in some markets expected to underpin demand, most expect to see new regulations.

Indeed, Canada's financial watchdog has warned regulated mortgage providers against teaming up with unregulated rivals on so-called "bundled" loans that sidestep rules designed to clamp down on risky lending, a top regulator told Reuters.

But introducing further efforts to cool the housing market could be a delicate proposition for policymakers.

With economic momentum still fragile two years after the worst of the oil price crash and Canada facing uncertainty regarding U.S. trade policy, any hit to exports or the labor market could hurt housing demand with household debt to income standing at a record C$1.67 ($1.27) for every dollar of income, economists said.

"All else equal, we'd like an economy which had more growth from exports and less reliance on housing and household debt," said Avery Shenfeld, chief economist at CIBC Capital Markets.

"But we need a run of positive export volumes to be sure that the economy can afford the drastic cooling of the housing's contribution to grow."

(Polling by Anu Bararia and Purnita Deb; Editing by Ross Finley and David Gregorio)

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