Canadian home prices to fall in real terms next year as affordability, mortgage rules bite: Fitch

Canadian home prices to fall in real terms next year as affordability, mortgage rules bite: Fitch

Compared to 23 other countries in the outlook, Fitch’s forecast for house price growth in Canada comes in near the bottom

Co-living could be the new trend in Vancouver and Toronto10:08

Canadian house prices in real terms will fall modestly next year because they’re out of reach for many buyers and others that want to enter the market can’t get loans, according to debt assessment firm Fitch Ratings.

The country will see house price growth of about 1 per cent, which, when set against inflation of around 2 per cent, will mean a real decline, Fitch said Tuesday in its Global Housing and Mortgage Outlook — 2020.

“We think stretched affordability (especially in Toronto and Vancouver) and macro-prudential measures that limit the number of borrowers able to qualify for home loans will continue to limit home price growth,” Fitch analyst Susan Hosterman wrote. “Home price growth in both markets has been limited by national lending limits and local purchase restrictions.”

Fitch presents a slightly more dour outlook to house price growth than real estate agents such as Royal LePage, which forecast a 3.1 per cent increase in the cost of two-storey detached homes next year as millennials in Montreal, Ottawa and Toronto shift to the suburbs from urban condos.

Of particular concern to Fitch is affordability as average household indebtedness reached 177 per cent of disposable income this year. While Fitch expects the Bank of Canada to keep interest rates at 1.75 per cent through next year, an increase to 2 per cent in 2021 and ensuing higher rates could strain the ability of Canadians to repay debt, it said.

Affordability could be most stressed in Toronto and in the Vancouver market, where Royal LePage says the average two-storey detached house will cost $1.46 million next year, the most in Canada.

“Vancouver prices have been steadily declining since 2018 while Toronto prices briefly stalled before growing at a more modest 4 per cent in the year to September,” Hosterman said.

Still, Fitch expects mortgage arrears to remain near historic lows, at 0.3 per cent next year, as homeowners are bolstered by low unemployment at 5.7 per cent, solid job growth and rising wages.

Compared to 23 other countries in the outlook, Fitch’s forecast for house price growth in Canada comes in near the bottom, second lowest only to Italy at a 0.5 per cent increase. Colombia is highest at 7 per cent; U.S. house prices are predicted to grow at 3 per cent next year. Canada and the U.K. are the only countries to be rated stable/negative in an overall market evaluation, while all the rest are assessed stable.

The growth of mortgages will likewise be low next year at 1 per cent, Fitch forecasts, as qualification standards for loans remain stringent. In contrast, mortgage activity in the U.S. may fall by 5 per cent as refinancing slows, Fitch said.

It noted how the Canadian Mortgage and Housing Corp., the country’s largest public mortgage backer, is reducing its role in the market with about 20 per cent fewer loans qualifying for government insurance because of tighter restrictions. A CMHC program to help first-time buyers in meeting equity requirements may help boost the market a bit, the ratings company said.

“While this should help make home ownership more affordable, buyers are still subject to tighter standards imposed by the government,” Fitch said.

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