OTTAWA — An overbuilt and overpriced condominium market
is posing a risk to Canadian households, banks and the economy in general, the
Bank of Canada warned Thursday in its latest review of the health of the
country’s financial system.
New housing already purchased and in the pipeline
continues to propel the Canadian real estate market but worries persist about
what happens when that tap turns off.
For now, the industry got another bit of good news Monday
with Canada Mortgage and Housing Corp. saying new home construction or starts
reached the lofty 200,000 level in May on a seasonally adjusted annualized
basis.
The central bank particularly singles out the Toronto
condo market, which it notes continues to carry a high level of unsold
high-rise units in the pre-construction or under construction phases.
Overall, the bank says it believes both global and Canada financial conditions have improved somewhat despite the subdued pace of the economic recovery.
Overall, the bank says it believes both global and Canada financial conditions have improved somewhat despite the subdued pace of the economic recovery.
In Canada, the growth in household credit has continued
to slow and has fallen broadly in line with growth in disposable income, and
overall activity in the housing market has moderated.
But it is still worried about the housing market, and
particularly condos in Toronto.
“If the upcoming supply of units is not absorbed by
demand as they are completed over the next 12 to 30 months, the supply-demand
discrepancy would become more apparent, increasing the risk of an abrupt
correction in prices and residential construction activity,” it says.
“Any correction in condominium prices could spread to
other segments of the housing market as buyers and sellers adjust their
expectations.”
That could start what it terms a negative feed-back loop.
A plunge in house prices bites into net household worth, shatters confidence
and consumer spending, impacting income and job creation.
“These adverse effects would weaken the credit quality of
bank’s loan portfolios and could lead to tighter lending conditions for
households and businesses. This chain of events could then feed back to the
housing market, causing the drop in house prices to overshoot.”
The warning comes as Statistics Canada reported the price
of new homes nationally rose 0.2% in April from the previous month. Economists
had expected an a 0.1 increase.
The bank cautions that its unravelling scenario is not
what it is predicting. In fact, it still expects the correction in the housing
market to go smoothly.
“Nevertheless, simple indicators continue to suggest some
overvaluation in the housing market; house prices are high relative to income
and housing affordability could become a concern when interest rates begin to
normalize,” it adds.
The continuing highlighting of household imbalances,
despite noting that the risks have in fact lessened somewhat in the past six
months, suggests the central bank remains worried that with interest rates
likely to continue at near emergency low levels, the dangers of something going
off the rails intensifies.
Last week, the OECD singled out Canada as one of three
nations in the advanced economies with the most overvalued housing market,
adding that despite that elevated status, prices continue to rise.
Any number of shocks could send Canada’s house of cards tumbling, the bank says, particularly higher borrowing costs that pinches households already carrying record high levels of debt.
Any number of shocks could send Canada’s house of cards tumbling, the bank says, particularly higher borrowing costs that pinches households already carrying record high levels of debt.
Even an intensifying of the ongoing euro-area financial
crisis, which could occur, the bank says, because there are signs Europeans are
becoming weary of austerity and reforms.
“If the situation were to occur … trade and financial
linkages could spread the shock to other regions, leading to a more severe and
protracted reduction in global demand. This in turn could trigger a sharper
correction in Canada’s housing market.”
The bank says even if the worse does not happen, it will
take years for Canada’s housing imbalances to right themselves.
The report is the first published under Governor Stephen
Poloz who took the post June 3 as Mark Carney left to head the Bank of England.
Poloz told lawmakers last week he is concerned about the risks posed by
consumer debts that grew through the housing boom as banks increased mortgage
lending. He also said the limits of domestic-demand led growth have become
clear.
Household debt reached a record 165% of disposable income
in the fourth quarter, and Finance Minister Jim Flaherty tightened mortgage
rules last year to avoid what he called signs of overheated condominium markets
in Toronto and Vancouver. Statistics Canada will publish first-quarter debt
figures later this month.
The central bank
forecast Thursday that the debt to disposable income ratio will stabilize this
year. Other signs of “constructive evolution” of household imbalances include
slowing housing starts and resales since mid-2012, according to the report.Julian Beltrame, Canadian Press | 13/06/13 | Last Updated: 13/06/13 11:45 AM ET
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