Poll: Canada's frothy housing market likely to cool on new mortgage rules

By Anu Bararia

(Reuters) - The Liberal government's new mortgage rules are likely to sober up Canada's housing market over the coming year, a Reuters poll showed, but record-low borrowing costs should bolster demand.

After soaring on the back of rock-bottom interest rates and foreign investment, Canadian house prices are expected to slow to 1.8 percent in 2017. An August poll forecast 3.5 percent.

The property market - a key driver of Canada's economic growth - will be hit by tighter lending rules the government imposed in October, in an effort to cool activity in two of the country's biggest cities, Toronto and Vancouver, analysts in the latest survey of over 20 respondents said.

"You will see some negative impact coming from the changes to regulations and I will not be surprised if house price inflation in Vancouver, the GTA (Greater Toronto Area), and even Montreal, slides down, or if we see some negative numbers," said Benjamin Tal, deputy chief economist at CIBC Capital Markets.

Toronto house prices are expected to rise 6.0 percent next year and fall 1.8 percent in Vancouver, compared with the previous poll's expectations they would rise 8.0 percent and 5.0 percent. A majority of analysts said the risks to their current forecasts were skewed to the downside.

While U.S. real estate prices only recently got back on track after their collapse in 2007, in Canada they have risen nearly in a straight line, almost doubling over the last decade.

Two rate cuts by the Bank of Canada last year to combat the fallout of the 2014 oil price crash further spurred housing activity in Canada, encouraging households to borrow ever more heavily against ever more expensive properties.

In the second quarter of this year, the average Canadian household owed $1.68 for every dollar of disposable income.

High household debt and weak economic growth form a challenge for policymakers, who can neither lower rates to stoke growth nor raise them to discourage further borrowing.

A separate Reuters poll predicted the Bank of Canada will stand pat on policy for more than a year, even though lackluster export growth is likely to increase household debt and make a housing market crash more painful.

Answering an extra question in the poll, economists gave a median 17 percent chance of a sharp correction in house prices in Canada over the near to medium term. They pegged the odds at one in five in Toronto and almost one in three for Vancouver.

Following a tax on foreign home buyers to improve affordability for residents, home sales in Vancouver plummeted by 39 percent in October, according to the Real Estate Board of Greater Vancouver.

But with rates on hold, some analysts said the housing market will adjust to the new laws quickly and push up prices again.

"We saw that in previous tightenings of mortgage rules," said Sal Guatieri, senior economist at BMO Capital Markets. "They did have a temporary slowing effect on sales and prices across Canada, particularly in Vancouver and Toronto, but each time interest rates continued to fall, mortgage prices bounced back."

Canadian house prices are expected to rise by 2.0 percent in 2018. Forecasts ranged from a drop of 3.0 percent to a rise of 9.0 percent.

A slowdown in the construction of new houses, mostly of single-family detached homes, is likely to support a rebound in prices, especially of condominiums, which are already in abundance.

Housing starts are predicted to average around 180,000 per quarter over the coming year, down from 192,900 in October.

"Although the new mortgage rules will put some downward pressure on demand and prevent some first-time home buyers from entering the market, demand will continue to outpace supply, and there may be even more pressure on prices to rise than forecast," said Jean-Paul Lam, professor of economics at the University of Waterloo.

(Polling by Purnita Deb; Editing by Ross Finley and Larry King)