Male hand with pen on the investment chart with calculator and canadian dollars

The Canadian housing market is expected to see slower growth in 2018, with Toronto and Vancouver increasingly vulnerable to a correction, says Fitch Ratings

The rating agency sees overall housing prices increasing by about 5% this year, down from about 10% in 2017. Recent growth has been very uneven, Fitch notes. “Toronto and Vancouver have seen increases of nearly 50% since the start of 2015 while Montreal, Calgary and Edmonton, for example, have experienced only single-digit growth or no growth over the same period,” Fitch says in a news release.

The large increases in Toronto and Vancouver leave those markets particularly vulnerable to a reversal, Fitch says. It also notes that Canada continues to have the highest household leverage within the G7.

Policymakers’ efforts to address those risks, including measures from the Canada Mortgage and Housing Corp. (CMCH) and the Office of the Superintendent of Financial Institutions, “to tighten underwriting and qualification standards… should help protect against future defaults among new borrowers and temper home price growth,” Fitch says.

“Tighter bank-originated uninsured and CMHC-insured mortgages will reduce borrower eligibility, which may slow home price growth and allow fundamentals to catch up with prices. Barring an unexpected shock, a mild correction in prices would be likely if the actions taken to date have the intended effect,” it adds.

Fitch forecasts that Canadian interest rates will increase by 50 basis points per year in both 2018 and 2019. It also expects mortgage credit growth to slow to approximately 3% per year for the next two years.