The weather isn’t the only thing that’s hot right now. The housing market is also overheated.
Fitch Ratings, a global rating agency, recently announced that Canadian home prices are overvalued by 20 per cent based on historical drivers of home price growth. They also noted that if the market doesn’t begin dropping on its own, then the federal government may have to step in to prevent a crash.
While historically low interest rates have made consumer borrowing cheap for the last six years, these rates have also contributed to the high levels of household debt-to-income ratios, which currently sits at an average of 163 per cent. This means that Canadians own $1.63 for every dollar earned. The low rates, together with a tight supply of homes available in metro areas, are key factors for propping up the market.
Fitch Ratings also warned that interest rates are more likely to rise than fall, which could then put pressure on those who bit off more debt than they could chew. While Ottawa has already moved several times in the past few years to restrict lending to those who could be vulnerable, prices still continue to rise and have done so 4.4 per cent in June compared to June 2013. During this same time, the average home price also rose 7.1 per cent to $416,584.
According to a recent survey, Canadian mortgage lenders feel the market is at risk of entering bubble territory. However, while experts have long predicted a slowdown in the housing marketing, they’re comparing the market to a balloon rather than a bubble; one that will slowly deflate rather than burst.