Risks in the Canadian housing market are continuing to grow as already-inflated home prices are set to head higher, warns Fitch Ratings in a new report on North American housing markets published on Wednesday.
The report, which was published on Wednesday, predicts that U.S. home price growth will outpace Canada’s growth in 2016, and warns of greater risk in the overvalued Canadian market.
Canadian housing prices will grow by 2.5% in 2016, compared with 4.5% in the U.S, the report says. “However, unlike the U.S., Canada’s national prices are overvalued by more than 20% compared to long-term economic fundamentals, leaving Canadian home prices exposed to more downside risk,” the report adds.
Home prices in Canada increased by almost 6% in 2015, the report notes, but with weak oil prices starting to undermine economic growth, it says “affordability remains a concern.”
“High prices have caused borrowers to take on increasingly large debt burdens to purchase homes,” the report says, adding that household indebtedness in Canada is now among the highest of the countries Fitch rates, at 165.5% of disposable income.
In 2016, Canadian home affordability “will continue to be pressured as prices rise, albeit modestly,” the report predicts. “Should Canadian interest rates rise in concert with U.S. policy tightening, wage growth will be insufficient to prevent the Canadian market from cooling.”
At the same time, “the lack of risky mortgage products and high average borrower equity should mute the impact of an increased debt burden on performance”, the report says, and it predicts that Canadian arrears will remain stable at very low levels this year.
Overall, the rating agency’s outlook for both the Canadian and U.S. housing and mortgage markets in 2016 is stable.
In the U.S., while nominal prices are expected to approach levels reached during the 2006 housing bubble, prices “appear more sustainable than a decade ago”, the report says, given the growth in the population and income that has occurred since then. “When adjusted for inflation, U.S. home prices remain more than 20% below their 2006 peak levels. And new home construction in the U.S. is rebounding from its post-crisis lows but remains below long-term historical averages,” the report says.
That said, some regional U.S. markets are overvalued, the report notes. In particular, it predicts that California and Texas “may experience a softening in their housing markets, though large downturns are unlikely.”