Canada’s housing market continues to build momentum

Canada’s red-hot housing market continues to be a head scratcher for economists and a source of concern for policymakers.

The latest figures show another jump in the number of houses being sold and built, alongside a rise in prices in markets across the country.

The doom-and-gloom scenario some had predicted for Canada’s housing market hasn’t happened, at least not yet. While some believe those calls were always unfounded, others worry some of the factors driving the surge in Canada’s housing market are setting it up for a hard fall in the near future.

Consider the Bank of Canada’s surprise signal last month that interest rates won’t be rising anytime soon. That is a sigh of relief for borrowers, but could also spur increased spending backed by credit or loans.

Canada’s debt-to-household income ratio remains near record levels, which has the federal government and the Bank of Canada worried about what happens when interest rates eventually do go up.

Economists say the outlook for household debt doesn’t look good, especially as the real estate market continues to defy expectations.

“The recent resurgence in the resale housing market has led in all likelihood to increased mortgage borrowing and will probably lead to a jump in the widely watched debt-to-income ratio,” said CIBC deputy chief economist Benjamin Tal.

“That is the last thing the Bank of Canada and the finance [department] would like to see.”

The federal government has already tried to curb Canada’s hot housing market by continuously tightening mortgage rules, including as recently as last year.

The Bank of Canada warned last month that if the housing market gets much hotter that it could “increase the risk of a correction in house prices down the road.”

While the Bank of Canada appears to have little room to move, economists such as Tal think the federal government will wait for more household debt and housing data to come in before deciding whether to take further steps.

That includes figuring out whether the recent rise in housing sales is largely a reaction to rising mortgage rates. While the Bank of Canada is holding its rate steady, mortgage rates have been heading higher.

Economists believe rising rates are behind the recent burst in sales activity in recent months. Buyers are motivated to get off the fence by either by taking advantage of preapproved mortgages at lower rates or locking in now to hedge against the threat of rising rates.

October’s sales activity seems to back that theory. Sales of existing homes rose 38 per cent in Vancouver, 19 per cent in Toronto, and 8 per cent in Calgary. In September, average sales across the country rose by about 18 per cent.

Housing starts are also heating up more than economists expected, rising to 198,000 units last month, up from just under 193,000 in September.

“Yes the numbers are stronger than expected ... but it can be temporary,” says Tal.