OTTAWA (Reuters) - With a new tax on foreign homebuyers in Vancouver expected to slow purchase activity, there is a greater risk that the city's lofty real estate prices would be vulnerable to a potential jump in local unemployment, Fitch Ratings said on Monday.
Earlier this month, Vancouver implemented a 15 percent tax on foreign home buyers to try to address a lack of affordability for residents.
The new tax will likely be effective in tamping down buyer activity, Fitch analysts wrote, but with signs that the market may have begun to cool even before the tax, that leaves Vancouver home prices more exposed to potential changes in Canada's economy.
"We feel that the foreign investors have been propping up real estate in Vancouver, creating more demand, which is raising prices," said Susan Hosterman, director of U.S. structured finance at Fitch Ratings.
"With them potentially out of the picture, Vancouver is more susceptible to Canadian supply and demand behavior, which is mainly driven by employment."
While Vancouver's job growth has been strong, Hosterman said it was a question of how long that will last given lackluster job creation in other parts of the country.
Vancouver's unemployment rate was 5.4 percent in July, according to Statistics Canada, one of the lowest amongst Canada's major cities.
The foreign buyers tax was the latest effort by authorities to reign in the housing market in recent years. Last December, the new Liberal federal government introduced measures requiring those who want to buy more expensive homes to provide a bigger down payment.
Some cooling in the Vancouver market may have already begun, Fitch said, pointing to recent data from the Canadian Real Estate Association that showed monthly sales have dropped 21.5 percent since peaking in February.
Canada's housing market has been robust in the years since the financial crisis, lifted in part by cheap borrowing costs. The national real estate landscape has become more fragmented recently with activity in oil-sensitive regions slowing and prices in Vancouver and Toronto accelerating.
The Bank of Canada has warned about possible speculation occurring in the two major cities.
Fitch estimates that national home prices are more than 20 percent overvalued compared to long-term economic growth, with markets increasingly exposed to downside risk.
Fitch said it plans to publish updated overvaluation estimates for major Canadian cities by the end of the year.
Reporting by Leah Schnurr; Editing by Alan Crosby