Kinch, reacting to Bank of Canada Governor Mark Carney’s speech delivered yesterday, said while he understands the bank’s concern with the city’s housing market, he doesn’t foresee foreign investment in luxury properties dropping off anytime soon.
“As long as that Asian money is available the market will be sustained. Underlying all of this is the fear of a rise in rates – if the rates go up from 2.4% to 4% it could cause a bubble to burst, according to Carney. However, the Asian buyers are not vulnerable to rising rates, so that is not likely to slow them down,” he told CRE Online.
Carney warned on Tuesday that some markets in Canada, and in particular Vancouver, are “already severely unaffordable” and that rising levels of investment in residential real estate could cause “an overshoot in the condo market in some major cities.”
The overvaluation in Vancouver, which now has an average selling price that’s 11 times the average household income, is nearing the level of unaffordability in cities, such as Hong Kong and Sydney, Carney said.
The strength of the Canadian market during the last decade, and particularly coming out of the recession, has been partly the result of the country’s sound labour market, Carney said, but “it also reflects historically favourable borrowing conditions, and potentially overly optimistic assumptions about future developments.”
Carney said housing affordability in Canada, which is now at its worst level in 16 years, was undermined by buyers and investors using cheap credit to bid up house prices instead of investing in businesses and export markets, leaving housing-related debt, which was historically less than business debt, at two-thirds more.
“Given such developments, one cannot totally discount the possibility that some pockets of the Canadian housing market are taking on characteristics of financial asset markets, where expectations can dominate underlying forces of supply and demand,” Carney said. “The risk is that expectations become extrapolative, prompting the classic market emotions of greed and fear—greed among speculators and investors—and fear among households that getting a foot on the property ladder is a now-or-never proposition.”
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