“In Canada, rising household debt levels and high house prices remain two key interrelated vulnerabilities,” the bank said in its annual review of the financial system. Despite rising house prices by 53% nationwide between April 2020 and April 2022, the bank is concerned that recent home buyers do not have the equity to afford a “significant price correction” and “will face greater financial pressure when renewing their mortgages at higher interest rates. . » Last week, the Bank of Canada signaled its willingness to raise its key interest rates above the previous 3% target, which would put additional pressure on those with floating-rate mortgages and home equity credit limits. The bank says many of the recent home buyers have “rushed” to buy a property at record prices for “fear of losing” the continuing rise in house prices in the Canadian housing market. The bank blamed the massive rise in house prices on strong supply-side demand and the growing number of investors buying real estate. Investors accounted for 22% of real estate purchases with mortgages in the fourth quarter of 2021, up from 19% in 2019, according to the bank. These investors are raising existing funds on other properties they own to make new purchases, which the bank says “highlights the feedback loop between the rapid gains in house prices and the strong demand for housing created by investors.” Housing prices remain at an all-time high across Canada, but the bank warns that it is too early to say whether the recent decline in resale activity and prices is “temporary or the beginning of a deeper, steady decline”. If investor demand for Canadian housing weakens, the bank warns that this would “boost downward pressure on prices” and could “lead to a sharp correction in prices in the future”.
