Bank of Canada Worried about Housing Prices

The Bank of Canada has highlighted the potential for an “abrupt correction” of Toronto’s oversupplied condominium market, which would quickly threaten the broader economy if allowed to transpire unchecked.

During its bi-annual review of the health and state of the financial system on Thursday, the central bank echoed its concern about an excess of unsold condos, with particular reference to Toronto. The Bank of Canada stated that “[i]f 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.”

The report warned that the correction would have a negative impact on employment, consumer spending, and incomes, with an eventual depression of institutional loan portfolios. The report further suggested that developers are constructing units at a faster pace than rationalized by population growth.

The Organisation for Economic Co-operation and Development (OECD), an international think-tank that works with governments to stimulate certain economic and social policies, has indicated that Canada, relative to rents and incomes, is one of the three most overvalued real-estate markets in the world. The other two nations are Norway and Belgium.

But despite the warnings about real estate, the Bank of Canada did conclude that the hazards facing the financial system have decreased, referencing an easing of short-term risks in Europe and the United States in conjunction with a modest global economic improvement. Perhaps more pointedly, the central bank also acknowledged that a “constructive evolution of imbalances” in the housing sector have tempered household mortgage lending.

Senior Economist at the Bank of Montreal (BMO), Robert Kavcic weighed in, stating that although prices are not cheap in Toronto, and other Canadian markets, the real estate market is “miles away from the severe bubble conditions of the late 1980s.”

In my opinion, the Bank of Canada is pandering to the bubble mongering crowd that is waiting and wishing for a severe market correction. The fact of the matter is, that the there is a significant difference between overvalued and a bubble. A market driven by growth, jobs, incomes and a relatively healthy financial system is in marked contrast to a market that experiences exponential price increases driven by speculation. We may expect a cull in the investor sector; however this will result in price stabilization as opposed to a crash, as speculative investment has not comprised a significant portion of overall real estate activity in Canada.

The major risks come not from within our borders, but what we may now unabashedly refer to as the “Economic Problem Child”: the euro zone. If Europe is not able to implement major and drastic fiscal and fundamental reforms – an area the Bank of Canada believes “little progress has been made” – there will prolonged and catastrophic fallout to the nations and financial institutions of the euro zone. Right now, Canadian banks enjoy healthy balance sheets and have copious access to low-cost money, and corporate leverage is close to all-time lows.  But, the catastrophic deterioration of the health of the European financial system will have detrimental effect on the Canadian financial system via trade channels and confidence in the market as a whole, which will inevitably spread to the balance sheets of Canadian institutions and the economy as a whole.

Regardless, if you’re thinking about making a switch, purchasing a home, or refinancing your mortgage, contact your REALTOR® & Mortgage Broker, or feel free to give us a shout, and We’ll be happy to chat.

Best Regards,

Goetz Kopf
REALTOR® and Senior Private Loan Specialist - Residential & Commercial
Century 21 Desert Hills Realty and EQ Lending Corp.

 

And

 

Daman Lehal
Broker/Owner of EQ Lending Corp.

 

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