June 2, 2015 / 2:24 PM / 2 years ago

Canada home prices seen rising, but debt levels a worry-Reuters poll

Construction workers build a new house in Calgary, Alberta, April 7, 2015. House prices have fallen in Calgary after the price of oil plummeted late last year according to local media reports.Todd Korol

(Reuters) - Canadian home prices will rise modestly this year, giving some additional support to an economy that remains sensitive to housing market activity, according to a Reuters poll that also found analysts concerned about household debt levels.

A long period of record-low borrowing costs has encouraged investment in the property market and helped Canada's economy brave the worst of the global financial crisis, which brought a booming U.S. housing market to its knees.

But as average home prices doubled over the past decade, borrowers piled on debt, lifting the household debt-to-income ratio to a record high of 163.3 percent.

Canadian home prices are expected to rise 3.4 percent this year, up sharply from a prediction of 1.8 percent in a February survey, but slower compared with the rise over the past six years, the poll showed.

Expectations for 2016 and 2017 were also revised higher to 1.3 and 1.7 percent, from 1.0 and 1.4 percent respectively.

Some analysts fear the Canadian market is overinflated and headed for a sharp correction, especially as a slump in energy prices has hurt home sales in oil-producing provinces like Alberta.

"The stronger growth numbers seen toward the end of 2014 were in part tied to stronger-than-expected trends in residential investment. However, we are not forecasting housing to be a major growth contributor in 2015," said Nick Exharos, economist at CIBC World Markets.

Canada's economy suffered its biggest contraction in nearly six years in the first quarter, after growing 2.2 percent in the previous one, with business investment and exports falling as the country grappled with the steep decline in oil prices.

As oil prices regained slightly at the start of the year, the Canadian dollar strengthened, triggering worries about an export-led economic recovery at a time when a sustainable rebound in the U.S economy still remains under doubt.

However, house prices in the U.S. are expected to rise significantly this year. [US/HOMES]

In Canada, house prices are already at a record high, led by major cities Toronto and Vancouver, although they have cooled dramatically in some other markets, including Calgary, Alberta, the biggest city in Canada's Western oil-industry region.

"Given current high valuations, relative to incomes and rents, and expectations of rising interest rates...A sudden turn could weigh heavily on sentiment, risking a collapse in household spending and residential investment," said Mark Hopkins, senior economist at Moody's Analytics.

Policymakers have begun expressing worries over high consumer debt levels and its close ties to the performance of the housing market.

Prime Minister Stephen Harper warned just over two weeks ago that some consumers were overexposed to mortgage debt, even if the housing market remained stable.

Oil and gas products account for a significant part of Canada's gross domestic product and exports. The drop in oil prices between last June and early this year hurt the economy.

That prompted a surprise 25 basis point cut in the Bank of Canada's key interest rate in January but nearly all economists in a separate Reuters survey said the next move would be up, adding pressure on borrowers and the housing market. [CA/POLL]

The central bank has said one cut was insurance enough for now to deal with lower energy prices, but that it was closely watching the economic data.

"Currently, existing home sales are supported by historically low interest rates, but this will not last forever," said Marc Pinsonneault, senior economist at National Bank of Canada.

Polling by Deepti Govind; Editing by Bernadette Baum

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