Canada’s federal banking regulator has said the housing market is in the late stages of a “speculative fever” and warned that prices could drop by as much as 20% in some cities.
“There is a speculative fever that takes over private markets and that’s what’s playing out,” said Head of the Office of the Superintendent of Financial Institutions Peter Routledge on “The Herle Burly” podcast on Wednesday. “My expectation is that as rates go up, assuming they do, some of that fever is going to abate a little and you’ll see a slowdown in prices.”
Routledge said that the increase in home prices across Canada during the COVID-19 pandemic has been fuelled by various effects. These include households “sitting on equity” because of rising home prices in the past decade, low delinquency rates and a “herd mentality” as prices increased and the Bank of Canada dropped its benchmark lending rate to zero.
He added that as these effects recede, housing markets will cool, and some of them might correct. In some markets where there were increasing prices, he said, people could expect “a fall of 10%, 20%, even.”.
Routledge said that he believes the price drops he expects in some cities will not pose a broader threat to Canada’s financial system. Toronto and Vancouver, he said, have experienced similar price declines before.
Canada’s housing market has been setting records throughout the last decade, led by Toronto and Vancouver. Soaring prices have spread to other cities across Canada, however, as people continue to look for larger, cheaper homes.
Routledge said that investors took advantage of the opportunity to make money, accounting for about 22% of home sales now as opposed to 15% in the past.
He said that investors’ interest in the housing market will likely decline.
“With rates going up, with the general recognition that, ‘Boy, housing is pretty fully valued,’ I’m not sure your expected return in the housing sector,” he said. “I think a smart investor would think twice and maybe look at other outlets.”
A number of Canadian cities saw house price increases averaging at or near six figures in 2021, according to Canadian Real Estate Association (CREA) data obtained by Blacklock’s Reporter.
CREA data showed that 666,995 homes were sold across Canada in 2021. According to the data, the year-over-year average Canadian home price went up by 18% to $713,542 in December.
“There are currently fewer properties listed for sale in Canada than at any point on record,” said CREA senior economist Shaun Cathcart in a statement to Blacklock’s. “Unfortunately the housing affordability problem facing the country is likely to get worse before it gets better.”
Figures showed average price gains at or near $100,000 or more in Victoria, Vancouver, Toronto, Ottawa, Montreal and Halifax.
