Vancouver is ``an extreme example’’ of a Canadian housing market where sky-high prices will moderate but where some pockets could nonetheless be on the verge of overheating amid still-low borrowing costs and outside factors such as foreign investment, Bank of Canada Governor Mark Carney said Wednesday.
In a much-anticipated speech to the Vancouver Board of Trade, Mr. Carney said even as growth in mortgage credit has started to slow, residential investment nationwide is now near peak levels, partly because of ``historically favourable borrowing conditions’’ but also ``potentially overly optimistic assumptions about future developments.’’
``Some excesses may exist in certain areas and market segments,’’ Mr. Carney said. ``The elevated level of `multiples’ inventories, the ample pipeline of developments under way, and heavy investor demand (much of it foreign) reinforces the possibility of an overshoot in the condo market in some major cities.’’
Without using the word ``bubble’’ to describe a housing market where prices have risen by more than 30 per cent from their lowest point during the recession, and without saying that the central bank is prepared to do anything to tame the sector, Mr. Carney left little doubt that he is concerned. Mr. Carney also noted that, in Vancouver as in other ``globalized’’ real-estate markets like Sydney and Hong Kong, Asian wealth is coming in as investors diversify and look for hard assets, contributing to valuations that in some cases are ``extreme.’’
Mr. Carney also repeated warnings that the benchmark interest rate and all borrowing rates that it influences will not stay low forever, noting that housing affordability would fall to its worst level in 16 years if the average real mortgage rate – currently at 2.4 per cent – rose to 4 per cent. Repeating warnings he has sounded for more than 18 months as Canadian borrowers binged on cheap credit, Mr. Carney said the share of households that would be ``highly vulnerable to an adverse economic shock’’ has risen to its highest level in nine years and urged borrowers and banks to be careful.
Indeed, while the mortgage market in Canada is more conservative than in places such as the United States, where the subprime lending collapse triggered the 2008 financial crisis and Great Recession, Mr. Carney pointed out that real-estate loans now make up more than 40 per cent of Canadian banks’ assets, compared with 30 per cent a decade ago, a situation he called ``unprecedented exposure.’’
``The central position of housing assets and liabilities on the balance sheets of both households and financial institutions means that any housing excesses could generate important vulnerabilities in the financial system,’’ Mr. Carney said. ``Historically low policy rates, even if appropriate to achieve the inflation target, create their own risks.’’
Mr. Carney repeated language from his May 31 interest-rate decision, at which he left the benchmark rate at 1 per cent for a sixth consecutive time, saying that even with lingering ``global uncertainties,’’ some of the stimulus in the system will be ``eventually withdrawn’’ if the economic expansion continues. In the meantime, though, Mr. Carney reiterated that Canadian authorities will ``need to remain as vigilant as they have been in the past to the possibility of financial imbalances developing in an environment of still-low interest rates and relative price stability.’’
The central banker has often suggested that policy makers view narrowly tailored regulatory changes, such as rules introduced earlier this year by Finance Minister Jim Flaherty to tighten the mortgage market, as more appropriate to deal with the issue than lifting borrowing costs throughout the economy.
In his speech, Mr. Carney said the central bank ``manages policy for the economy as a whole, rather than any specific region or sector.”
Mr. Carney likely didn’t randomly choose Vancouver to sound his latest warnings, but fresh data on Wednesday from the Canadian Real Estate Association bolster the notion that other parts of the country could be overvalued.
Prices of homes in many of Canada’s largest cities are surging. The housing market isn’t wildly hot - the pace of actual sales is in line with the 10-year average - but prices continue to escalate, rising 8.6 per cent nationally in May to $376,820 from $346,950 a year ago, according to CREA’s statistics. Vancouver is at the centre of the gains, with prices up an astounding 25.7 per cent to $831,555 from $661,745.
“If that’s not bubble terrain, what is?” Douglas Porter, a BMO Nesbitt Burns economist, wondered in a note.
Surging prices for houses in particular neighbourhoods in Vancouver - the city’s west side, for instance - are such a factor that the real estate association said if the city is removed from the national tally, the gain in prices in May would have been 5.6 per cent rather than 8.6 per cent.
Toronto prices rose 8.7 per cent from a year ago, Montreal was up 6 per cent and Regina jumped 17.8 per cent (though it has not yet cracked $300,000). However, Alberta, buoyed by oil but hurt by weak natural gas prices, is stagnant, with prices down 0.5 per cent in Calgary and 2.7 per cent in Edmonton.
