On Thursday, a warning was made by the Bank of Canada as it released their current semi-annual assessment of the risks faced by the country’s economic system. The warning was about the increase in house prices that seems to be unsustainable and likely to get out of hand at its current pace. The real estate market is looking to be more flexible in the long-run and it is doubtful that the demand fundamentals will be a justified reason for the increase in the house prices.
The governor of the Bank of Canada, Stephen Poloz had answered to some questions during an interview and went on to say that “If prices are going up because people expect prices to go up, then that, of course, is probably unsustainable.”
He cautioned potential home lenders and buyers to not induce the current increase of prices, but rather weigh their options in the near future when purchasing a home. He added that the expectations will turn out to be invalid and unrecognised in the long-run, which creates a high-risk in terms of the household segment.
While other economic factors in Canada seem to be balanced and has a steady price increase, the prices of houses in Vancouver has peaked to about 30 percent and 15 percent in Toronto in the previous month. The bank made a comparison of the stunted home sales, receding prices and oil-producing areas with the soaring prices in Vancouver and Toronto real estate market. It came to the conclusion that the vulnerability of the unsteady real estate market has increased to a higher rate. This is not a first time a warning concerning the Toronto and Vancouver real estate market was made public, says TD Bank economists. CMHC also made this same announcement earlier on.
Leslie Preston who is a senior economist at TD said, “The action taken by the Bank of Canada to make the warning clear was supported by TD and thought it was a right move to make.”
They expect the home prices to come down a notch by 2017 when the rates start to increase and demands begin to weigh in on overvaluation in the key market. After the Minister of Finance, Bill Morneau made a remark about the feds doing a “deep dive” with regards to the real estate market, which will decide the outcome of the increase in prices or the control over the influence foreign investors have on the affordability of housing. The comments made by the Bank of Canada and Poloz were released a day after.
With home prices increasing, interest rates are getting lower and current existing credits are increasing the debts to the same level as incomes. This will pose a threat to the economic system because of the huge amount of debts by the Canadian families. People losing their jobs are faced with a financial strain on most homes that are extremely leveraged, especially in places affected by the low price of goods. Currently, the country’s financial system seems to be alright and unaffected since its previous report in December.