Despite signs of potential crisis, market remains ‘well-balanced’

Wednesday, August 7th, 2019

A Bloomberg study suggests Canada may be heading for a downturn

Ephraim Vecina
Canadian Real Estate Wealth

A Bloomberg study has found Canada to be one of the nations at greatest risk of a housing downturn, but Royal Bank of Canada CEO David McKay asserted that the market remains “as something in well-balanced territory.”

“We continue to monitor all supply-and-demand signals coming out of the housing market,” McKay stated in an interview with Bloomberg.

“We do expect housing stock investment to slow over the coming year, and there will be a little less creation in the condo and single-family home markets, responding to potentially slower demand,” the executive admitted, but quickly added that “the housing price and resale market corrections are generally healthy.”

The statements came in the wake of a recent analysis by Bloomberg Economics, which deemed Canada and New Zealand as the economies most vulnerable to housing price corrections.

In both nations, the potential danger was indicated by the price-income and price-rent ratios far exceeding their respective long-term averages.

Fortunately, these trends would not automatically lead to crisis. “We’re going to see some markets cool a lot more than they have, but we needed to slow this down through policy.”

The federal government, and especially fiscal watchdog OSFI, has been roundly criticized for the B-20 rules instituted last year. Nevertheless, the results have shown that it was, on the whole, a good step to take.

“Vetting consumers for a higher-interest-rate environment was prudent. It’s taken a number of buyers out of the market – temporarily, as they build a greater down payment for that mortgage,” McKay explained.

As the regulations arose from a very specific market context, they will have to adapt to shifting conditions accordingly.

“At the time, with the heated markets and the growth and the amount of foreign capital coming in, competing with domestic capital for residential housing stock, it was prudent,” McKay said. “As things slow down, we may have to take a second look at some parts and tweak them, but from a structural perspective, it was prudent policy.”

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