The sharp rise in prices in the country’s two hottest housing markets isn’t likely to continue, a Bank of Canada (BoC) report says.
The central bank’s semi-annual Financial System Review, which was released Thursday, says the supply of homes will increase over the long term and strong price increases will no longer be justified.
In May, year-over-year home price growth jumped 30% in the Greater Vancouver Area (GVA) and 15% in the Greater Toronto Area (GTA).
The BoC report also notes that two risks for the country’s financial system have increased this year.
The first risk is associated with high household indebtedness. In the GVA and GTA, some borrowers have taken on larger mortgages due to the rapid jump in housing prices.
The share of both insured and uninsured mortgages issued in 2015 with a loan-to-income ratio (LTI) above 450% increased to 15% from 12% in the prior year. Weighted by value, these high LTI mortgages accounted for 21% of all insured mortgage debt originated in 2015, up from 16% in 2014.
A larger LTI mortgage would typically result in households making larger payments relative to their income.
“Higher LTIs are making households more vulnerable to both an adverse shock to income and higher interest rates,” states the report.
Despite the increase in mortgages with high LTIs, the BoC says arrears rates remain very low and are actually declining in British Columbia and Ontario because of rising home prices and growing employment in those regions.
However, should housing prices plunge and unemployment levels surge, high levels of indebtedness could lead to a sharp increase in household stress, which would put upward pressure on arrears rates.
The other risk to the financial system has to do with the imbalances in the country’s overall housing market.
While home prices in Ontario and B.C. continue to rise, sales in both Alberta, Saskatchewan, and Newfoundland and Labrador are at a low level and prices are still declining due to deteriorating labour market conditions. In the rest of Canada, most markets are well balanced.
The BoC also notes that the potential for a downturn in home prices in the GVA and GTA has increased if housing demand drops.
“The rapid pace of price increases seen over the past year also raises the possibility that prices may be supported by self-reinforcing expectations, making them more sensitive to an adverse shock to housing demand,” the report says.
However, the central bank believes a strengthening economy and rising incomes will reduce these risks over time.
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