February 24, 2016 / 1:30 PM / 4 years ago

Pricey Canadian housing market to lift economic growth this year: Reuters poll

(Reuters) - Canada’s housing market will be a net contributor to economic growth in the coming year, impelled by rising prices, but become a drag soon after due to a slowdown in buying and high levels of household debt, a Reuters poll found.

Construction workers finish siding work on a new housing development on lands owned by the Tsawwassen First Nation, a short distance south of Vancouver, British Columbia, March 9, 2015. REUTERS/Julie Gordon

Boosted by borrowing costs near record lows, the housing market has been one of the brightest spots in Canada’s recovery since the global financial crisis.

While house prices in the neighboring United States have been recovering slowly after the historic crash of 2008, in Canada they have nearly doubled in the past decade with households piling on record amount of debt.

The recent collapse in the price of oil, a major Canadian export, has created a schism in the Canadian housing market.

Two interest rate cuts and cheap debt have pushed prices in the already stretched markets of Toronto and Vancouver to new highs. But in oil-producing provinces like Alberta, job losses triggered by the oil market crash have hit property values and raised fears of a correction that could spill over to other parts of the country.

Indeed, in a December poll , analysts said the housing market would become a drag on the economy in a couple of years.

Still, for 2016, the latest poll of 24 housing market analysts forecast house prices would rise 3.3 percent, an upgrade from 3.0 percent in the previous survey.

“The housing market may remain a key contributor over the next three to six months as the knock-on effects from home prices, sales and housing starts gains can be lagged,” said Diana Petramala at TD Economics.

“But the market will likely become a net drag as sales and starts move back in line with historical averages and price growth eases,” she added.

The survey predicts house price rises will slow to 1.0 percent in 2017 and then rebound to 2.0 percent in 2018.

After the Bank of Canada cut interest rates last year to soften the blow of the oil price plunge, house prices rose. They have already surpassed the affordability limits of the average Canadian homebuyer in some places.

Even as the economy crawled out of a recession in the third quarter of 2015, the household debt-to-income ratio hit a record high of 163.7 percent. Chances of another recession are seen as high as 35 percent.

However, most economists in the poll negated the risk of a sharp fall in house prices over the next 12 months and forecast home building to remain robust between 180,400 and 185,000 units per quarter this year.

“The risk of a correction in Toronto and Vancouver will increase when interest rates go up, which won’t be this year,” said Sal Guatieri, senior economist at BMO Capital Markets.

According to another Reuters poll, the central bank will keep rates on hold until mid-2017, partly due to high household indebtedness, which the Bank has acknowledged as one of the biggest risks to Canada’s financial system.

Moreover, with the U.S. Federal Reserve expected to tighten policy further this year, Canadian mortgage rates could go higher, increasing the chances of a correction.

Polling by Aaradhana Ramesh and Sujith Pai; Editing by Chizu Nomiyama

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