Latest in Mortgage News: Canada’s Housing Market Not a Bubble…Yet: BMO

Despite concerns about ever-rising home prices, Canada’s housing market still doesn’t resemble a bubble, at least not yet, according to BMO economist Robert Kavcic.

“I hesitate to throw the word bubble around just because something has increased in price, even if it’s increased a lot, as Canadian housing has,” Kavcic said in an interview with BNN Bloomberg.

He noted that over the past decade, fundamentals tied to demographics, interest rates, income and supply have “more or less justified” housing market performance.

While there was a “little bit of excessive strength” in 2016 and 2017, Kavcic said policy-makers responded quickly.

“Even over the past year, there’s been a dramatic shift in preferences, a very strong recovery in employment at the higher end of the income spectrum, plus the decline in mortgage rates that have, for the most part, been able to explain a lot of what we’ve seen,” he said in the interview.

“Where it gets concerning is if that strength starts to feed on itself and we get to the point where prices accelerate simply because people think prices are going to rise further,” he continued. “That’s what I would define as a bubble. I would say we’re not there yet, but if we look out over the course of the next year, that is certainly one area that I would keep a close eye on.”

Homeowners’ net worth rose $238 billion in Q3

While rising home prices are a growing obstacle for first-time buyers, they’re also rapidly growing the net worth of existing homeowners.

The total value of residential real estate rose $238.4 billion in the third quarter, accounting for more than half of the increase in national wealth, Statistics Canada reported. Non-residential real estate, meanwhile, was up by $125.6 billion.

In total, the value of Canada’s non-financial assets rose by 3% in the quarter to reach $14.6 trillion.

Mortgage borrowing remained robust in the quarter, with households adding $45.9 billion in new debt, bringing total mortgage debt to $1.9 trillion. This helped drive overall credit market borrowing to its second-highest quarter on record at an increase of $51.6 billion, second only to Q1.

“Overall, mortgage borrowing accounted for nearly 9 in 10 dollars of net additions to credit market debt,” StatCan noted.

The data also showed a decline in the national savings rate, falling from 14% in the second quarter to 11% in Q3. “Nonetheless, households still recorded another quarter of strong savings, a trend that began in the second quarter of 2020,” the report added.

Supply-demand imbalance to drive continued, but slower, home price growth: Fitch

A lack of housing supply coupled with strong demand should continue to drive Canadian home prices higher throughout 2022, albeit at a pace well below that seen in 2021.

In its latest Global Housing and Mortgage Outlook, Fitch Ratings is forecasting average prices to rise between 5% and 7% this year, followed by milder growth in 2023.

“The slower growth will be driven by an expected rise in interest rates, inflationary pressures and declining affordability, which will dampen demand,” the report reads.

But on the other hand, factors that will continue to drive demand include low interest rates, net immigration and rising rents, Fitch added.

Additional regulatory measures could also be introduced, such as additional stress tests or new taxes on non-owner-occupied homes, which would also hinder price growth.

“These measures would further limit the number of borrowers who qualify for a mortgage or make it less economical to own a non-owner occupied property, which in turn would limit the number of buyers in the market,” the report continues.

Similar to other forecasts, Fitch also sees Canada’s arrears rate remaining near historical lows—between 0.15% and 0.25%—through 2023. This is primarily thanks to the record price growth and buyer demand, which has allowed borrowers in distress to sell their homes and pay their remaining balances.

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