February 24, 2015 / 3:18 PM / in 3 years

Oil price crash raises risk of Canada housing market correction: Reuters poll

Realtors' signs are hung outside a newly sold property in a Vancouver neighbourhood where houses regularly sell for C$3-C$4 million ($2.7-3.6 million) September 9, 2014. REUTERS/Julie Gordon

(Reuters) - The recent collapse in oil prices has heightened risks that Canada’s long housing boom is due for a correction, according to a Reuters poll.

Nearly three-quarters of forecasters polled said the chances of a sharp fall in home prices have risen compared with three months ago. Most said the plunge in the price of crude oil would be the most likely trigger for a housing correction.

Still, a majority of analysts said house prices falls are likely to be limited to the provinces in Western Canada that depend heavily on oil extraction, production and export.

After nearly doubling over the past decade, average home prices in Canada are expected to rise more slowly this year and next, while homebuilding could also cool from elevated levels.

House prices are expected to rise 1.8 percent in 2015 and 1.0 percent in 2016, according to the poll. That’s a sharp drop from the 5.2 percent and 2.0 percent growth predicted in November, as forecasters price in the full extent of damage.

Construction of new houses will likely fall to a 180,900 unit seasonally adjusted annual rate by the end of the year from 185,000 at the start, roughly unchanged from the previous poll.

“Commodity intensive provinces are expected to undergo a pronounced correction. Employment and incomes will be hit, exacerbating the household imbalance risk,” said Mazen Issa, senior Canada macro strategist at TD Securities.

Oil and gas products account for roughly 10 percent of Canada’s gross domestic product and over one-quarter of its exports. The recent drop in prices of the commodity prompted the Bank of Canada to cut its benchmark rate by 25 basis points to 0.75 percent in January, a move that caught markets off guard.

As an insurance against further economic weakness, the central bank hinted at further policy easing, despite Canada’s relatively high household debt-to-income levels. On average, Canadians hold debt worth over 1.5 times their income.

While respondents in the poll said over-indebted households should not prevent the central bank from cutting rates further, Scotiabank’s Adrienne Warren said the risk bears watching.

“Historically low borrowing costs will continue to support housing affordability and housing demand. However, high household debt burdens have increased the vulnerability of households and the housing market in the event of a negative economic or financial market shock, including a sharp rise in unemployment or interest rates,” she said.

The bank is expected to cut rates again in March or April, putting them at 0.50 percent by the end of the year. It is still expected to start raising rates next year, though, ending 2016 at 1.25 percent.

Reporting By Anu Bararia; Editing by Ross Finley and W Simon

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