Prices are now rising at a rate of roughly 25 per cent a year in Vancouver and 12 per cent in the Toronto area, according to the bank.
Advertisement
The severity of the risks associated with a sharp correction in real estate prices in Vancouver and Toronto as well as from household financial stress has risen, said the bank’s semi-annual financial system review released Thursday.
“Job losses have increased financial stress for highly indebted households in the regions most affected by low commodity prices”.
“In these two markets, it is unlikely that economic fundamentals will justify continued strong price increases”, the bank noted.
“The probability (of a severe recession) remains low as the economy continues to grow, supported by continued expansion in the United States, and accommodative monetary policy and fiscal stimulus in Canada”.
The bank – which said the Canadian financial system was resilient and functioning effectively – estimated the chances of a severe recession were low, given the economy was continuing to grow as the US expanded and interest rates stayed low.
In the report, the bank pointed out that “self-reinforcing expectations” are fueling both the price run-up and increasingly risky borrowing by some buyers.
“This suggests that prospective homebuyers and their lenders should not extrapolate recent real estate performance into the future when contemplating a transaction”, Poloz said in a statement from Ottawa.
Finance Minister Bill Morneau, asked on Wednesday whether he might take further measures, said the government was “looking at all evidence” as it considers whether it needs to move again to tighten mortgage regulations.
Morneau did not specify what sort of changes the government was considering or how soon it may introduce them.
When it comes to real estate, the report says foreign demand is one reason for price growth in Vancouver and Toronto. The bank said 15 per cent of mortgages issued a year ago went to purchasers with loan-to-income ratios of greater than 450 per cent, up from 12 per cent in 2014. It found that a 15 per cent price drop would leave 13 per cent of borrowers owing more than their homes are worth.
“We see a rate of price increase that would be very hard to match up with any definition of fundamentals”, he said, following the release of the central bank’s semiannual Financial System Review.
The bank noted, however, that it’s hard to measure the impact of foreign investment on the housing market.
The report, which examines vulnerabilities and risks to the financial system, also highlighted other persistent concerns.
Markets in the Toronto and Vancouver are exposed to a cycle where rising mortgage debt and prices feed off each other as buyers rush to get into the market, the central bank said, adding a crash is the biggest risk to the financial system.
Advertisement
Asked about Ottawa’s rule tweaks, Poloz said he believes they have helped make the system more resilient.
