HSBC sounds alarm over ‘vulnerable’ Canadian housing market as global home prices cool
- Higher interest rates, cooling measures have dampened sentiment in cities like Vancouver and Toronto
Home prices, a gauge of an economy’s health, cooled across the globe in the last quarter of 2018, but higher interest rates in Canada have made the country’s housing market more vulnerable than other economies, according to the latest report from HSBC.
In the last three months of the year, nominal prices of residential units were up by an average of 4 per cent globally, while real prices climbed 2 per cent.
Nominal home prices in Canada rose 2 per cent, while real house prices declined 0.1 per cent, significantly lower than the 4.5 per cent and 2.3 per cent gains in the nominal and real house prices, respectively, of its closest neighbour, the US, according to data from the Bank for International Settlements.
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Canada’s tightening of monetary policy over the last two years has added about 1 percentage point to household debt servicing costs, which means households need to allocate a bigger portion of their income to pay for credit card loans or mortgages, according to economists at HSBC. Debt service charges in Canada are currently near historic highs.
“As the Bank of Canada started to raise rates in mid-2017, households and the housing market face financial challenges through mid-2019 and beyond,” said the report authored by economists James Pomeroy, Paul Bloxham, and David Watt.
Besides the interest rate increases, Canadian cities Vancouver and Toronto had rolled out cooling measures in recent years such as additional taxes levied on foreign homebuyers. Vancouver increased the tax to 20 per cent in February, up from the 15 per cent which took effect in August 2016. Toronto and its surrounding area imposed a 15 per cent duty on foreign property investors in April 2017.
In January 2018, federal authorities tightened mortgage lending regulations and introduced more vigorous stress tests for potential borrowers.
On the other hand Canada’s robust job market, which grew by 3.1 per cent in the first quarter of the year, the second highest after Spain’s 3.2 per cent growth, is shielding the housing market from further declines. This may not last, the report warned.
“It usually takes about two years for interest rate increases to begin to affect arrears. So long as the job market remains strong, we would only expect any increase in arrears to be quite small. That said, the low arrears rate might not give a reliable measure of the financial situation of the household sector,” the HSBC report said.
“Amid anecdotal evidence that a rising number of households are facing financial constraints, we see the housing sector as facing a precarious challenges in coming months.”
