There is no doubt that Canada has been one of the best performing economies since the economic crash of 2007. It continues to attract foreign investment, the economy will be the best performing of the G7 over the next 12 months and the property market has gone from strength to strength. Indeed, the property market has been so strong that various state authorities have been forced to bring in foreign investment taxes to reduce price squeezes. However, the Organisation for Economic Co-Operation and Development (OECD) is concerned about the short to medium term outlook.
Initially the OECD expected the Canadian economy to increase by 2.8% during 2017 although this has now been upgraded to 3.2%. The forecast growth for 2018 remains unchanged at 2.3% although there could be some adjustment, upwards and downwards, depending on what happens over the next few months.
On the surface, a growing economy, strong property market and demand from foreign investors seems like a win-win situation. However, there are concerns that some of the short term growth in the Canadian economy is based upon one time investments such as that in the oil and gas industry – after a partial oil price could be. So, we may be getting slightly more optimistic short-term growth figures because of one-off investments.
The Moody’s credit rating agency has taken a negative outlook on Canada’s top six banking institutions. There are growing concerns about the level of private sector debt to GDP as well as growing household debt in general. When you bear in mind that mortgage debt has doubled over the last decade, the house price to disposable income index has increased by 25%, this is obviously cause for concern.
While the negative stance of Moody’s will surprise many people there is the potential for a wobble in the Canadian housing market especially if we see further interest rate movements. Just recently the Bank of Canada increased overnight rates twice within two months which now stand at 1%. While the 1% base rate is obviously minimal, it is moving upwards and higher rates will eventually impact the mortgage market, increasing household debt yet more.
Are households ready for an increase in base rates?
It is fair to say that Canada is not alone in benefiting from low base rates as the worldwide economy continues to recover from the 2007/8 setback. Historically low mortgage rates have obviously increased demand for housing stock and in many ways foreign investment in this area has been the icing on the cake. When you consider mortgage debt has increased, doubled in the last decade, and general household debt continues to soar, it is not difficult to see the emergence of a “difficult situation”.
As the debt burden and pressure continues to grow on household incomes this will eventually contribute to a slowdown in the Canadian housing market. The OECD is concerned that any twitch in the market could prompt profit-taking hence making a difficult situation even worse. Any increase in mortgage defaults would have a major impact upon Canadian bank balance sheets. While the OECD is right to be concerned in the short to medium term, Canada has an excellent track record in managing its own economy, taking a sensible no-nonsense approach, as and when required.
Are we on the verge of a Canadian housing market collapse? Probably not, but we could be in line for a slowdown……….