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(Reuters) - House prices in Canada will climb further over the next few years, driven in part by bets that urban centers Toronto and Vancouver have more steam left, even as household debt reaches historic highs, a Reuters poll found.
The Canadian property market has been buoyed by low borrowing costs as well as foreign investment over the past decade, even as the U.S. economy was brought to its knees following a collapse in the housing market in 2007.
The U.S. market is now many years into a mild recovery, while Canadian house prices have risen in nearly a straight line, almost doubling over the past decade.
The latest Reuters poll of 19 analysts conducted May 18-June 7 suggested the upswing in the already stretched Canadian housing market will continue over the next three years.
House prices are expected to rise 5.5 percent in 2016, the fastest since polling for 2016 began two years ago. Just three months ago, analysts had predicted a 3.3 percent rise.
Although house price inflation is predicted to cool to just under 3 percent next year, that would still be the highest since polling began for 2017 over a year ago. The consensus for 2018 was for a 2.0 percent rise.
"There appears to be two things ... An influx of foreign wealth and more recently there appears to be greater investment speculation," said Sal Guatieri, senior economist at BMO Capital Markets.
"As prices are going up, they are being pushed even higher by foreign wealth or investor speculation, and that is forcing more households to take on bigger mortgages and debt to get into the housing market."
Property prices in Canada's two biggest cities, Toronto and Vancouver, are now expected to rise 9 percent and 16 percent this year, respectively. The highest forecast was for a rise of 20 percent and 50 percent.
A slowdown in new home construction has also driven prices higher.
Housing starts are now forecast to average around 190,000 per quarter over the coming year, about the same as last month but well below a peak of 290,000 in 2007.
The slowdown in construction, mostly of single-family detached homes, will push prices even further beyond the reach of property buyers and drive investment into other types of housing, such as condominiums that are already in abundance.
"What is surprising is that we are seeing condo prices now rising much faster. And that could reflect not just the lack of affordability in the detached market but possible speculation by investors in the condo market," BMO's Guatieri said.
With the household debt-to-income ratio at a record high of 165.4 percent, a further rise in prices would increase the burden on new buyers, something the Bank of Canada has acknowledged.
Asked to rate affordability of Canadian housing on a scale of 1 as the cheapest and 10 as the most unaffordable, the median answer was 6. That was in line with a rating of 6 given for U.S. housing in a similar Reuters poll last week. [US/HOMES]
For Toronto and Vancouver, analysts rated them 8 and 9, respectively, similar to what British property analysts rated both the UK nationally and London. [GB/HOMES]
Still, when asked about the risk of a sharp correction, analysts gave a one-in-four chance for Vancouver in the near to medium term, one-in-five for Toronto and just 10 percent nationally.
"One potential catalyst for a housing market correction is if we see a lot more weakness in the economy," said David Tulk, head of global macro strategy at TD Securities.
"But we have already been through a lot with the energy price shock and we have not seen much of a response in markets outside of Alberta. So, we need to see a nationally synchronized economic downturn to drive a big fall in the housing market."
Reporting by Rahul Karunakar and Anu Bararia in Bengaluru; Editing by Ross Finley and Jeffrey Benkoe