Inflated housing market making investors edgy, RBC report warns

Canada’s overheated housing market is making investors more and more worried, a strongly worded report from RBC Capital Markets warned Friday.

“The housing market serves as the most prominent risk to financial market stability in Canada,” wrote George Davis, chief technical analyst at RBC Dominion Securities.

Tweet This Click to share quote on Twitter: "The housing market serves as the most prominent risk to financial market stability in Canada," wrote George Davis, chief technical analyst at RBC Dominion Securities.

“We have been receiving an increased number of questions from investors about the underlying dynamics of the housing boom, along with key concerns and their potential implications for markets.”

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The Bank of Canada lowered interest rates in 2014 in response to plummeting oil prices. But low rates helped overheat housing markets, Davis explained. As a result, “the availability of cheap credit has stoked concerns that the economy may now be susceptible to a housing market shock as consumer leverage reaches a historical high.”

Davis downplays the role of foreign buyers in overheated markets in Toronto and Vancouver, pointing instead to low interest rates and higher incomes as the main drivers:

“While foreign buyers may be small in terms of absolute numbers, they are often buyers of the high-end, luxury segment that defines the highest property price points.”

In May, the price of a detached house in Vancouver had risen 30 per cent compared to the previous year. (There are signs that B.C.’s foreign buyer tax, announced in July, may be cooling the market, though an RBC report earlier this week suggested that the correction started before the tax was announced.)

Detached houses in Toronto rose 21 per cent by July, compared to July of last year.

A housing market correction would overextend homeowners caught up in a buying frenzy who assumed that prices would go up and up indefinitely, Davis warns:

“People anticipate that recent price appreciation will continue into the future and rush in to purchase real estate in the fear of being priced out of the market or missing out on anticipated future gains.”

As a result, rising prices become detached from underlying realities.