The Organization for Economic Cooperation and Development (OECD) fears that Canadian home sales may be ramping up to a bubble. According to the OECD, the Canadian government needs to cool off the overheating housing markets in Toronto and Vancouver.
Otherwise, external economic hardships coupled with favorable buying conditions could cause real estate prices to increase disproportionately, create a bubble, and then devastate the Canadian economy when it bursts.
The OECD stopped short of identifying specific methods that the Canadian government should use to cool off the housing market, but made reference to “macro-prudential” efforts Ottawa had successfully used in the past.
Most likely, this refers to an instance in December when Canada raised the down payment required to qualify for a government insured mortgage for homes valued between $500,000 and $1 million. In another instance, banks tightened their lending criteria to make sure that financing only extended to properly qualified borrowers that would be able to weather a later rise in interest rates without defaulting.
While these approaches had some positive influence, home prices in Canada have continued to skyrocket in a handful of markets. There are a shortage of listings, a growing foreign buyers’ market, and record low interest rates countering the measures enacted by the government. In fact, in Toronto, house prices have risen by 16.2% over the same month last year.
“Very low borrowing rates have encouraged household credit growth and underpinned rapidly rising housing prices, particularly in Vancouver and Toronto, which together are a third of the Canadian housing market.” These statements were part of an OECD report released Wednesday.
“In relation to household incomes, both house prices and household debt are high. Macro-prudential measures have been strengthened recently but should be tightened further and targeted regionally.”
Unfortunately, the OECD’s overall outlook for the global economy – and Canada’s piece of it, in particular – has gotten worse since November. The global economy is expected to stall, experiencing just 3% growth this year.
While Canada’s economy is gradually improving thanks to an increase in non-energy exports, this still leaves the nation subject to housing market fluctuations. Foreign investors may turn to Canadian real estate as a good, long-term investment while domestic investment opportunities grow less promising.
“The main domestic downside risk is a disorderly housing market correction, particularly in the high-price Toronto and Vancouver markets. This would damp residential investment and private consumption, and could threaten financial stability,” the OECD’s report warned.