Policy makers may have to do more to dampen the overheated Canadian real estate market, Fitch Ratings suggests.
In a new report, the rating agency indicates that Canadian home prices rose 7.1% in May, on a year-over-year basis, according to the Canadian Real Estate Association (CREA). Fitch says that its sustainable home price model, which measures home prices relative to long-term fundamentals, finds that Canadian home prices remain approximately 20% overvalued in real terms.
Additionally, the firm says that high household debt relative to disposable income “has made the market more susceptible to market stresses like unemployment or interest rate increases.”
While Fitch expects the unemployment rate to remain in its current 7% range, it notes that already-low interest rates are unlikely to fall further. “Rising interest rates could pressure the market more than others given high borrower leverage and the short-term structure of Canadian mortgages,’ it says.
The rating agency notes the Canadian government has taken several proactive steps in recent years to mitigate some of the risks to the housing market — including tightening the underwriting guidelines for CMHC-insured loans, reducing the provision of low-ratio portfolio insurance offered to lenders and limited securitization of insured mortgages, and the Office of the Superintendent of Financial Institutions (OSFI) has issued a guideline for prudent bank underwriting.
“However, the long-term impacts remain unclear, and policy makers may be required to take additional steps over the short term to engineer a soft landing,” it concludes.