(Reuters) - Canada’s housing market is likely to be a drag on economic growth over the next couple of years, thanks to too much supply and high levels of household debt making further buying a risky affair, a Reuters poll found.
The housing market has been one of the brightest spots in the Canadian economy in recent years. Strong housing helped Canada weather the worst of the global financial crisis as the U.S. housing market south of the border collapsed.
But analysts say property will no longer be able to do the heavy lifting for Canada’s economy as many new households stretching themselves to buy expensive property have become deeply indebted. Housing turnover has also slowed.
The slowdown has been particularly sharp in Alberta, where much of Canada’s oil exports are produced, and which has been hardest hit by the collapse in the price of crude.
“We have relied on housing and housing investments to carry growth through most of the post-recession period and it’s time for the housing market to put its feet up and take rest,” said David Watt, chief economist with HSBC Bank Canada.
“The footprint of the housing market and residential investment on the economy is just unsustainably high,” he added.
A slight majority of analysts in the Reuters poll, 13 of 21, anticipated the housing market would be a drag on the economy in the coming years, compared with eight who expected it to be a net contributor.
But even with all the concern over household debt and the economy slowing down, the median forecast of 23 housing market analysts showed home prices will still have risen by 5.5 percent this year, more than the 5.2 percent in August’s survey.
House price inflation is expected to slow to 2.0 and 1.5 percent in 2016 and 2017. Just one-third of the economists polled forecast a correction by 2017.
“The housing market remains one of the biggest downside risks to the Canadian economy,” said Jean-Paul Lam, associate professor of economics at the University of Waterloo.
“With rising debt levels, a fall in housing prices would seriously impair the balance sheet of consumers, adversely affecting consumption and the Canadian economy going forward,” he said.
After the Bank of Canada cut interest rates twice this year to soften the blow of the oil price shock, house prices have risen further, especially in Toronto and Vancouver.
Home prices have nearly doubled over the past decade, while the household debt-to-income ratio reached a record high of 165 percent by the end of June.
The Bank of Canada has acknowledged high household debt is a vulnerability for Canada’s financial system and estimates the housing market could be overvalued by as much as 30 percent.
While house prices in the U.S. have been recovering for years after an historic correction, in Canada they have surpassed affordability limits of the average Canadian homebuyer, particularly for regular homes.
There are still vast numbers of condominiums being built, particularly in Toronto and Vancouver.
However, a majority of analysts said the recently elected Liberal government will not take any action to cool down the housing market. Home building in Canada is forecast to remain robust over the next year and average around 180,000 units.
The U.S. Federal Reserve is widely expected to hike rates at its last policy meeting of the year in two weeks. That could take Canadian mortgage rates higher.
“The new government is likely to watch housing closely, but wait to see how (the) Fed tightening affects mortgage rates and home buyer demand before implementing regulatory changes,” said John Weis of Moody’s Analytics.
Polling by Anu Bararia; Editing by Chizu Nomiyama