Bank of Canada: Condo Market “Heightened Risk of A Correction”

The Bank of Canada issued a warning to current and would-be condo owners in December’s Financial System Review. The BOC also states that the risks to the stability of Canada’s financial system are high and have increased markedly over the past six months, owing primarily to an escalation of the sovereign debt crisis in the euro area and a weaker global economic outlook.

Regarding the Canadian housing market:

Certain areas of the national housing market may be more vulnerable to price declines, particularly the multiple-unit segment of the market, which is showing signs of disequilibrium: the supply of completed but unoccupied condominiums is elevated, which suggests a heightened risk of a correction in this market.

Given the vulnerable state of their balance sheets, households would be less able to cope with the impact of significant adverse shocks. Two interrelated events to which Canadian household balance sheets are vulnerable are a significant decline in house prices and a sharp deterioration in labour market conditions.

Since high-ratio mortgages in Canada are insured, it is likely that a moderate fall  in house prices would affect systemic risk primarily through the negative feedback loop with the real economy. In such a scenario, declines in house prices would lead to lower household net worth, reduced access to secured credit and  lower employment in the housing-related sector. These factors would reduce
consumer spending and increase strains on household balance sheets.

Some measures of housing affordability suggest continued imbalances, owing to the robust performance of this market. In particular, house prices remain very high relative to income (Chart 26). Since the adverse impact of elevated residential property prices on affordability has been largely offset by low interest rates, affordability would be considerably curtailed if interest rates were closer to historical norms (Chart 27).

You can read the entire BOC review here

(click to enlarge image)

(click to enlarge image)

3 responses to “Bank of Canada: Condo Market “Heightened Risk of A Correction”

  1. I’ve said this for years now.
    It’s the realturds fault!
    crash is on!

  2. “Analyst Stefane Marion…said the amount of inventory on hand [in Toronto] would take 19.3 months to sell, below the historical average of 26 months.” Unless he’s misplaced the decimal point, it kind of makes you grateful for Calgary’s inventory of 4.3 months…

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