Challenges to Canada’s Housing Market
In a previous post, we talked about Scotiabank’s predictions of a slowdown in the housing market later this year.
Now we have further evidence of this trend, courtesy of the price-to-rent ratio. This ratio is one of the signs that a housing bubble may be building. In a healthy housing market, rents generally keep pace with housing prices. In Canada right now, it is much cheaper to rent than it is to buy. In fact, the discrepancy between housing prices and rents is greater in Canada than it is anywhere else in the world, with the exception of Sweden.
As a recent article in the Financial Post points out, our current price-to-rent ratio makes it clear that there is little justification for the doubling of housing prices we have witnessed in the past decade. Low rent means there is no shortage of housing, so why the sky-high housing prices?
While we at CMI still maintain that Canada is not in a housing bubble, we do believe that house prices are overvalued, as does David Rosenberg of Gluskin Sheff. Cited in the Financial Post article, Mr. Rosenberg estimates that prices are anywhere from 15% to 35% higher than they should be.
Prices this far off the mark will result in a correction in any case, but especially now. The interest rate hikes foreseen by many analysts are beginning to occur – both TD and RBC made incremental increases in their mortgage rates in late March.
Those hikes are nothing compared to what some people predict. The C.D. Howe Institute is recommending increases of 1.75% over the next year, which would put the rates for the popular 5-year, fixed-rate mortgage at about 7%.
An increase of just 1% could bring the number of financially vulnerable households in Canada to its highest level ever. If rates go up 1.75%, even more people could be affected. Combine that with lower values for houses, and there could be trouble ahead for borrowers close to or on the edge.
The bottom line is that homeowners and prospective buyers cannot count on housing prices to continue their ascent, nor can they bank on their house to cover them when interest rates and personal debt levels rise.
Anyone concerned about the impact of this perfect storm of interest rate hikes and lower housing prices may want to consider a consultation with a mortgage professional to discuss how to manage their mortgage and other debts.
