Heavy Investor Demand In Condos Could Cause ‘Overshoot’: Carney
Bank of Canada
Governor Mark Carney warned yesterday that some markets 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.”
“As I have observed, some markets are already severely unaffordable even at the current [interest] rates,” he said during a meeting with the Vancouver Board of Trade on Wednesday.
Carney warned that 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.
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.
“In particular, the elevated level of ‘multiples’ inventories, the
ample pipeline of developments under way, and heavy investor demand
(much of it foreign) reinforces the possibility of an overshoot in the
condo market in some major cities.”
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.”