September 15, 2016 / 5:52 PM / 10 months ago

WRAPUP 1-Canada housing sector cools as households hit record debt

4 Min Read

OTTAWA, Sept 15 (Reuters) - Canada's most expensive housing market braked sharply in August and the nation's long housing boom had begun to cool, while consumer debt levels hit a new record in the second quarter, separate data showed on Thursday.

While a housing slowdown could be the start of a long-feared housing crash or a much-needed moderation, the bump up to fresh highs in household debt will reinforce the Bank of Canada's concern about financial instability in a country where expensive housing has pushed consumers to the brink.

"It will keep their concerns elevated," said Craig Wright, chief economist at Royal Bank of Canada, noting that while the high debt level is mitigated by low interest rates, it highlights the vulnerability of borrowers who may soon see the value of their main asset, their homes, start to decline.

The debt-to-income ratio of Canadian households rose to a record 167.6 percent in the second quarter from 165.2 percent in the first three months of the year, Statistics Canada said. That means Canadians had C$1.68 of debt for every dollar of disposable income, among the highest rates in the world.

The central bank and policymakers have warned repeatedly about the risks of household indebtedness, which has been driven by heavy borrowing to get into Canada's expensive housing market and the cheap cost of money due to low interest rates.

Now signs that Canada's housing market has peaked could herald the start of a consumer retrenchment, with homeowners worried their houses will not be worth as much as they once were, even as their mortgages remain sky-high.

Sales of existing Canadian homes fell in August, the fourth straight monthly decline, with sales in Vancouver tumbling nearly 19 percent as a tax on foreign buyers doused activity in Canada's most expensive market, the Canadian Real Estate Association said in a report that also predicted prices will start to fall in 2017.

The industry group for real estate agents forecast national sales activity to rise 6.0 percent and average prices to climb 10.1 percent in 2016, before sales dip 0.6 percent and prices ease 0.2 percent in 2017. It blamed a new 15 percent tax on foreign buyers in British Columbia for a drop in August.

"I don't think (the market) will tip over, but having said that, I wouldn't be buying in Vancouver right now. I think there is a risk of capital losses," said David Carey, senior economist at the Paris-based Organisation for Economic Co-operation and Development.

Dan Werner, a senior equity analyst in Chicago who has followed Canadian banks and seen first-hand the fallout of the U.S. housing market collapse in 2009, said Canada still has a lot going for it, including a reputation for prudent lending.

Foreign demand for housing is likely to continue despite government efforts to curb it, Werner said, mitigating any loss of confidence among Canadian buyers.

"As long as housing appears relatively cheap from a borrowing perspective, and as long as banking stability is there ... it looks a bargain and a safe haven compared to the home countries" of buyers from China and the Middle East, Werner said.

Additional reporting by Leah Schnurr; Editing by Meredith Mazzilli

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