The financial model of the Bank of Canada estimates that the Canadian housing market is overvalued by 10 to 30%, said the governor of the central bank, Stephen Poloz, at a press conference after the publication of the Financial System Review (FSR).
It aims to identify key financial vulnerabilities and catalysts that could transform these vulnerabilities by risk to the financial system.
According to the Bank, three important vulnerabilities have developed in the financial system: the high level of household debt, imbalances in the housing market and the greater risk taking among investors.
Real Estate Market in Canada
“While much uncertainty surrounding this issue, various methods of estimation, including our own, there is a risk of overvaluation in the housing market and, according to our calculations, it would be of the order of 10 to 30%, “it said in the document presented by the Bank of Canada on Wednesday morning.
Bank of Canada notes that the country has experienced changes in house prices in the early 1980s and 1990s, after periods characterized by an overvalued price of the same magnitude. “However, these episodes were preceded by a much faster rise in prices, while inflation expectations were rising. In both cases, interest rates increased in the context of a monetary policy aimed at controlling inflation and recession resulted in, “reads the document.
However, the Bank of Canada says not observe any of these conditions today. “The house price rise was much more gradual and, amid widespread recovery, the unwinding of imbalances in the household sector should also be gradual. This is why we still expect a soft landing in the housing market, but it is conditional on the continued strengthening of the economy, “says the organization.
The Bank of Canada joust that soft landing in the housing market has not yet materialized, in part because mortgage rates have continued to decline over the last year, but also because of regional factors that have affect the supply and demand for housing. “Indeed, imbalances in the sector seem slightly increase nationally, as suggested by the significant recovery in resales and growth in house prices,” the report said.
FSR stresses that growth in house prices was 5 to 6% in 2014, a rate higher than income growth. “This has raised fears of a potential overvaluation in the housing market. Although it is difficult to determine with certainty, the wide range of estimates, including the results of new analyzes of the Bank of Canada suggests that there is some risk that residential property is overvalued “estimates the Bank management.
Disparities Across the Country?
The real estate market situation, however, varies greatly from region to region across the country. “The growth in house prices and activity in the market remained strong in some large cities in Southern Ontario and Western Canada. In the East, low price increases and activity in the housing sector, as well as the accumulation of housing stock, suggest a soft landing could be during “analyzes the institution.
The Bank of Canada believes that the overheating of real estate in Toronto and Vancouver is notably due to international immigration, a “fundamental economic variable.” Calgary is another hot market for a decade, due to the expansion of the energy sector.
However, the Bank points out that the economic fundamentals can change rapidly, citing the recent decline in oil prices. FSR also stresses that the oil decline could slow the real estate market in Alberta if it persists.
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