The Bank of Canada released the December issue of their biannual Financial System Review today which lists imbalances in the housing market as being one of the three important financial system vulnerabilities.
Some highlights are listed below, but the housing section begins on page 15.
- “Our expectation of a soft landing for housing hinges on stronger growth, employment and incomes.”
- “Imbalances in the housing market are edging higher, with a pickup in both resale activity and in the growth of house prices. A soft landing in the housing market has not yet materialized, in part because mortgage rates have declined further over the past year.”
- “New research done at the Bank of Canada, suggest that there is
some risk that housing markets are overvalued…running from 10 to 30 per cent.”
- “Canadian housing market has been overvalued by more than 10 per cent since at least 2007, and has exhibited only a modest degree of upward creep since 2009. This supports the view that a soft landing is the most likely way forward: a stronger Canadian economy will continue to support the housing market, while household imbalances gradually diminish.”
- “The national picture continues to mask important differences across regional markets”
- “The growth of house prices and housing activity has remained strong in some of the major cities in southern Ontario and Western Canada…this could reflect, at least in part, demand that is driven by underlying economic fundamentals—for example, international immigration to Toronto and Vancouver and the expansion of the energy sector in Calgary over the past decade. Fundamentals, however, can change quickly. For example, the recent downturn in oil prices could slow Alberta’s real estate market if it were to persist.”
To download the Financial System Review, click here
Referenced in the BoC report is a working paper entitled “International House Price Cycles, Monetary Policy and Risk Premiums” which provides an estimate of the likelihood of a house price correction in 18 OECD countries, including a case study for Canada. According to one measure, the chance of housing correction in Canada within 2 years is almost 20%.
To download the working paper, click here