Bank of Canada Says Investor Rush Into Housing Risks Correction
(Bloomberg) -- The Bank of Canada is warning a rush of investors into the country’s housing market this year has fueled prices and heightened the risk of a correction.
In a virtual speech Tuesday to discuss financial stability issues, Deputy Governor Paul Beaudry said risks around the housing market have intensified following a boom in prices that appear to be driven by speculative activity. The number of new mortgages held by investors has doubled over the past year, while those taken on by repeat homebuyers is up by more than 60%, according to a chart in prepared remarks provided to reporters.
“A sudden influx of investors in the housing market likely contributed to the rapid price increases we saw earlier this year,” Beaudry said in a speech to the Ontario Securities Commission. “That can expose the market to a higher chance of a correction.”
The higher prices, meanwhile, are forcing some households to take on extremely high levels of debt, adding to the risks that could emerge from a correction.
“The damage can spread far beyond the investors,” Beaudry said. “That’s because, for many households, their wealth and access to low-cost credit are tied to the value of their home.”
The comments come on the heels of one of the biggest upswings in Canadian housing ever this year, with prices climbing almost 40% nationally over the past two years.
The growing investor activity, coupled by rising prices, is part of a “worrisome development” that has seen activity in the market driven by “extrapolative” expectations that prices will continue to increase, Beaudry said.
“Extrapolative expectations risk creating a disconnect between actual home prices and their more fundamental levels,” he said.
One factor that could push demand for homes even higher is the resurgence in immigration, he said. Canada’s borders were closed for most of the pandemic and only recently opened.
Every six months, the Bank of Canada provides analysis around financial stability. That includes a full report -- typically in May --that outlines the central bank’s thinking on risks and can seem like a laundry list of concerns, followed by a speech at the end of the year.
How this analysis plays into the central bank’s policy decisions is unclear. Growing household vulnerabilities could give policy makers more reason to consider raising borrowing costs, for example, though higher rates would also inflate risks -- such as slow growth or a housing price correction. Beaudry didn’t spell out implications.
Other “significant” vulnerabilities cited in Beaudry’s speech includes the risks associated with high household debt levels, and mispricing climate risks that can leave businesses exposed to sudden losses due to the transition to a low-carbon economy.
While focusing on risks, Beaudry also pointed out the nation’s financial system would remain resilient even in the face of a major shock. He underscored how the system has held up throughout the pandemic, helped by policy support that has kept household insolvencies and corporate bankruptcies low.
Yet, Beaudry warned the share of highly indebted households is rising and will likely have more than reversed recent improvement earlier in the pandemic.
“The takeaway is that, overall, vulnerabilities linked to elevated household debt appear to be rising again after a slight pause,” he said.
On climate change, Beaudry said the Bank of Canada has been working “to sort out all the ways that climate-related risks could affect the financial system and economy over time.”
That includes scenario analyses that appear to confirm that delaying transition “carries a significant economic cost in the form of greater damage to homes, businesses and infrastructure.”
“Action that comes with a delay would need to be more abrupt than otherwise to achieve the same goal,” he said. “That would mean a more difficult transition. It also could make a sudden repricing of carbon-intensive assets more likely.”
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