Bank of Canada: investors influx to the real estate market may lead to correction
The central bank warns that a wave of investors into Canada’s real estate market we’ve seen this year has pushed up home prices and raised the risk of a correction (decline).
On Tuesday, Deputy Governor Paul Beaudry said risks concerning the national housing market have increased after a prices hike, caused by a strong speculative activity. The number of new mortgages registered by investors has doubled during the past year. At the same time, those held by repeat homebuyers rose by more than 60%.
“An unexpected wave of investors rushing into the real estate market probably contributed to the sharp price gains we’ve seen earlier in 2021,” – Beaudry said in a speech to the Ontario Securities Commission. “It may expose the market to a stronger possibility of a correction.”
Meanwhile, growing prices are making some households take on extremely large debts, increasing the risks that could appear because of the correction.
“The deal is that the damage may not be limited by investors only,” – Beaudry explained. “For many households, their wealth and access to cheap credit are connected to their property’s cost.”
The speech follows one of the largest activity hikes in Canada’s housing market this year, when home prices saw almost a 40% gain for two years.
According to Beaudry, there’s a factor that may push demand for properties even higher. It’s an immigration recovery. Canada’s borders were closed for most of the pandemic period, and they have recently opened.
The BoC releases analysis on the national financial stability every six months, including a thorough report outlining the Bank’s opinion on risks, followed by a speech at the end of each year.
It remains unknown how this analysis will affect the Bank’s policy decisions. Stronger household vulnerabilities may give the BoC one more reason to raise borrowing costs, even though higher rates could also increase such risks as slow economic growth or a housing price correction.
In addition to it, Beaudry also noted that Canada’s financial system would be still resilient even facing a significant shock. He stressed how the system was holding up during the pandemic, supported by policy measures that kept household insolvencies and corporate bankruptcies at a low level.