Canada's housing market is among the priciest in the world, and the household debt ratio has surpassed U.S. pre-crisis levels, according to a new report from Fitch Ratings Inc.
The credit-rating agency considers Canadian house prices as being unsustainable based on the underlying fundamentals, noting that the household debt to gross domestic product ratio reached almost 100% in 2016, which is higher than the U.S. peak in 2008.
"This is the first time that household debt has exceeded the size of the Canadian economy and is higher than the U.K. and U.S. household debt burden," the Fitch report says. "Mortgage debt is the No. 1 contributor to household debt in Canada."
Given the overvaluation, "the risk of a price fall in overvalued markets has risen," Fitch says, stressing that the Vancouver market is particularly concerning.
Yet, at the same time, given the rising population and a lag in new home construction, Fitch says it expects house prices to continue to rise nationwide. However, the rate of price growth will likely slow to 3% in 2017, down from 12% in 2016, amid government efforts to tighten loan eligibility and restrict certain buyers.
"More conservative down payment requirements, tighter underwriting standards, and potential lender risk sharing arrangements should help stabilize the housing market and improve affordability, despite the possibility of higher mortgage costs," the Fitch report says. "The cumulative effect of these changing dynamics on home prices is likely to be negative, but is yet to be determined as these steps are unprecedented."
The Fitch report also notes that borrowers in Canada would be highly sensitive to rising interest rates "given the current debt burdens." At the same time, it also says "the risk of a sharp rise in rates is remote." Fitch expects mortgage rates to remain low for the first half of 2017.
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