November 15, 2016 / 1:37 PM / 10 months ago

Canada home sales, prices, rise in October, but higher rates loom

Builders work on the the roof of a new home under construction in the Montreal suburb of Brossard, August 10, 2010. REUTERS/Shaun Best

OTTAWA (Reuters) - Canadian home resales and prices rose in October as the nation’s long housing boom continued, two separate reports showed on Tuesday, but analysts said higher borrowing costs have increased the risk of a correction.

Prices rose 0.3 percent last month from September and were up 11.8 percent from a year earlier as Toronto’s red-hot market offset the first decline in Vancouver in almost two years, the Teranet-National Bank Composite House Price Index showed.

A separate report from real estate agents showed a 2.4 percent monthly rise in sales in October and a 14.6 percent surge in annual prices as buyers rushed to get into the market before tighter mortgage rules could take effect.

Taken together, the data showed Canada’s market cooling in most markets outside of Toronto, where a building boom and rising household indebtedness have spurred fears of a U.S.-style collapse if borrowing costs, already rising, spike further.

“Almost all seems to be well in Canada’s housing market, with most regions enjoying moderate sales activity and price gains, Alberta’s hard-hit market stabilizing, and Vancouver’s zany market returning to earth,” Sal Guatieri, senior economist at BMO Capital Markets, said in a research note.

“However, accelerating prices in Toronto and its surrounding areas will only increase the chance of a correction if interest rates rise too sharply ... and the chance of that happening is now somewhat higher under a new U.S. president.”

Expectations that U.S. President-election Donald Trump will cut taxes, increase spending and accelerate inflation have driven bond yields, which affect mortgage rates, higher in recent days. Royal Bank of Canada, the country’s biggest lender, raised rates on Tuesday.

“If the recent increase that we see in bond yields are sustained and continue, then this would eventually have a cooling effect on housing across Canada,” said Robert Hogue, senior economist at Royal Bank of Canada.

Hogue still believes the market will manage a soft landing, as higher borrowing costs take effect gradually, and many borrowers are insulated by fixed-rate mortgages that are locked in, most often for five years.

The Teranet report showed continued strength in Ontario, the most populous province, offset the first decline in Vancouver in 22 months as a new foreign buyers tax doused the market.

Vancouver prices were down 0.6 percent in October from September but remain 22.5 percent above year-ago levels. Prices were up 17.4 percent in Toronto compared to a year earlier.

Editing by Alistair Bell

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