Higher rates, tighter mortgage rules cool Canadian home prices

Ottawa

HIGHER borrowing costs and tighter mortgage rules in Canada are seen dampening the country's home price growth more than previously anticipated this year and next, including in the once-hot markets of Toronto and Vancouver, a Reuters poll found. Still, after three interest rate increases since last July and at least one more expected this year, most analysts said they were unconcerned about homeowners' ability to pay their mortgages at higher rates.

Along with the rate increases, new rules implemented at the start of this year requiring so-called "stress tests" for borrowers have weighed on home sales and prices. Regulators are trying to ensure a soft landing for a market that was propelled by years of low interest rates following the global financial crash and ignited fears of a bubble in the major cities of Toronto and Vancouver. "I would expect the drag on house prices to persist through this year," said Sal Guatieri, senior economist at BMO Capital Markets. "We do expect the Bank of Canada to raise rates a couple more times (and) there will be a lingering impact of the tougher mortgage rules."

The median poll of 16 analysts forecast Canadian housing prices will rise by a median 1.9 per cent in 2018, down from March's forecast of 2.5 per cent. Next year is seen only slightly stronger at 2.1 per cent, down from the previous forecast of 2.8 per cent. In comparison, national home prices finished 2017 up 9.1 per cent compared to December 2016, according to the Canadian Real Estate Association.

In Toronto and Vancouver, prices are also expected to rise more modestly than previously forecast, the poll found. Toronto prices are expected to rise 2 per cent both this year and next, while Vancouver is seen gaining 5.5 per cent in 2018 before slowing to 3.4 per cent in 2019.

"The tougher mortgage rules are having the intended impact of cooling two previously red hot markets that were in the grip of a speculative blow out," Mr Guatieri said. Still, unless interest rates rise too quickly or the economy falls into recession, Mr Guatieri said he does not expect the housing market to suffer a drastic correction. Expectations have risen that the Bank of Canada could raise rates as soon as next month, though policymakers have said rate moves will be gradual.

Slowing consumer credit growth and higher income have also eased financial system vulnerabilities created by Canada's housing market and huge household debt, the central bank said earlier last week.

With borrowing costs still relatively low, 10 out of 12 analysts that responded to a separate question in the poll said they were not concerned about Canadians' ability to pay their mortgages at higher rates. Despite the cooler prices, groundbreaking on new homes is expected to stay robust, averaging higher than 200,000 units in each quarter for the rest of 2018. Housing starts of around 200,000 are generally seen keeping up with demographic demand. REUTERS