IMF warns of multiple risks to Canadian real estate prices
by Ephraim Vecina Jun 2018 MBN
While the Canadian real estate market remains vigorous in large part due to robust market activity (especially in the higher-end segments), the International Monetary Fund has warned of potential headwinds that could affect housing values – and might even trigger a domino effect that would ultimately harm the national economy.
Noting that real estate prices are a “key domestic risk”, the IMF specifically cited mortgage rates, price expectations, and unemployment as crucial metrics to watch out for. In a new analysis, real estate information portal Better Dwelling stressed that together, these factors are indeed a dangerous cocktail of instability.
The clear upward trend in mortgage rates is probably the main cause for concern, Better Dwelling stated. Probably the most notable example of recent such increases is the Bank of Canada’s decision to hike its average 5-year fixed rate to 5.34%, representing 15.08% year-over-year growth.
“That hike by itself reduces the maximum mortgages that can be borrowed by just over 7%. Not to mention the impact to the wallet of the nearly 50% of homeowners expected to renew their mortgages this year,” Better Dwelling stated.
A sudden, shocking adjustment in real estate prices also remains an ever-present possibility, according to the analysis. This is not helped by the fact that home prices nationwide have moved wildly (both upwards and downwards) since 2003, a clear departure from the previous decades.
“According to the US Reserve Bank of Dallas, real home prices in Canada are down 5.72% from the second quarter of 2017. People haven’t been paying too much attention to it due to the fact that prices were up 4.45% from the previous year. However, price declines stall demand, which feeds lower prices.”
And while unemployment levels are still hovering close to record lows, the situation might have planted the seeds of future weakness.
“Higher wages sound great, but at the phase of full-employment, it accelerates inflation. The acceleration of inflation has the counterintuitive effect of devaluing all wages. You make more, but you can buy less,” Better Dwelling cautioned. “Full employment is generally considered below 6% in Canada, and we’re at 5.8%. You should expect wages to pop, inflation to soar, and/or employment to jump higher. The move results in decreased profitability for businesses, often forcing them to look for ‘efficiencies’.”