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Fitch changes tune on Canada’s ‘over-heated’ housing market

Posted on Jan 31, 2014 in Mortgage Market Updates and News

John Greenwood
http://business.financialpost.com/author/johngreenwood/


Fitch Ratings which has argued that real estate in Canada is significantly overpriced now believes that the sector is headed for at worst only modest declines this year.

In a report published on Tuesday the rating agency said it expects prices to remain “broadly flat” in Canada, in contrast to Australia, Germany and the U.K., where values will rise due to low interest rates, solid economic growth and increased availability of credit.

According to Fitch’s Global Housing and Mortgage Outlook, mortgage volumes in this country “may fall slightly” as government efforts to tighten mortgage rules since the financial crisis exert downward pressure on demand.

“The Canadian government is exerting a moderating influence on the market, following concerns over the long-term viability of household debt levels and high house prices,” Fitch said. “This should lead to muted lending in 2014/15.”

“With prices having grown significantly faster than income and GDP over the last decade, affordability in Canada is very stretched despite record-low interest rates. Fitch expects affordability to remain stretched but steady in 2014 as prices remain broadly flat on a national level, while GDP will grow.”

The New York-based rating agency has been warning that Canadian house prices are overvalued by as much as 21% nationally. In a report issued in November it argued that prices could fall by up to 10% over the next five years.

Such a correction could put the overall economy at risk due to the large number of jobs tied to housing construction, it said.

Over the past 20 years Canadian real estate has more than doubled in value, with much of that increase taking place over the past five years despite efforts by the federal government to tighten the rules around mortgages. As a result, household debt has surged to record levels, raising concerns about the potential impact of a rise in interest rates or unemployment.

One reason Fitch believes Canada is not facing a rough road in 2014 is because it expects unemployment to remain stable at around 7%. Another key reason is because of limited use of risky mortgage products, curtailed in this country unlike the U.S. and other jurisdictions by strong government regulation.

But at the same time Fitch still maintains that housing prices are approximately 20% overvalued.


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