Canada house prices to rise sharply on cheap money, speculation

August 30, 2016 10:57 AM EDT

Realtors' signs are hung outside a newly sold property in a Vancouver, B.C., Canada neighbourhood where houses regularly sell for C$3-C$4 million (US$2.7-3.6 million) September 9, 2014. REUTERS/Julie Gordon/File Photo - RTSIA1K

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By Anu Bararia

BENGALURU (Reuters) - The sharp acceleration in Canadian home prices shows no sign of abating this year, though economists expect the pace will be reined in by high household debt and a growing lack of affordability, a Reuters poll found.

Foreign wealth, cheap borrowing costs and bets that urban centers Vancouver and Toronto will remain profitable will likely support the Canadian property market over the next few years.

House prices are forecast to rise 10 percent in 2016, almost double the pace expected in May's survey, and the fastest since polling for 2016 began two years ago, according to the poll of over 20 forecasters. There has been no consensus forecast in double digits since comparable records began in 2013.

Although the rise in house prices is predicted to cool to 3.5 percent next year, that would still be the highest since polling started for 2017 over a year ago. The median for 2018 was for a 3 percent rise.

"The story there is just the surprising acceleration in home prices in the greater Vancouver and Toronto areas and the spillover price pressures to their surrounding regions," said Sal Guatieri, senior economist at BMO Capital Markets.

"I would say almost certainly that foreign wealth is driving prices higher in Vancouver and Toronto."

Property prices this year in those two hot markets are expected to rise 15 percent and 22 percent, respectively, versus 9 percent and 16 percent in the previous poll. The highest estimate was for a rise of 20 percent and 32 percent.

After the Bank of Canada cut interest rates twice last year to dull the sting of the oil price crash, house prices rose further. They have nearly doubled over the past decade while the household debt-to-income ratio has reached alarming heights, 165.3 percent by the end of March.

The Bank has warned about the role speculation may be playing in driving up prices in Vancouver and Toronto, and has cited high household indebtedness as a serious vulnerability for Canada's financial system.

Even though the U.S. economy was brought to its knees following a housing market collapse in 2007, house prices in Canada have risen in nearly a straight line, surpassing affordability limits of the average Canadian buyer.

On a scale of 1 as extremely cheap and 10 as exorbitant, the median answer for national prices in the poll was 7, and for Toronto and Vancouver 8 and 9, respectively.

A slowdown in the construction of new homes will also likely push prices higher.

Housing starts are predicted to average around 188,500 per quarter over the coming year, less than 198,000 last month and well below a peak of 290,000 in 2007.

That slowdown, mostly in construction of single-family detached homes, will push prices further beyond the reach of young home buyers and drive investment to condominiums that are already in abundance, analysts said.

With the central bank expected to stand pat on policy until late next year, Vancouver earlier this month imposed a tax on foreign home buyers in an attempt to improve affordability for residents. [CA/POLL]

While that will likely hurt demand there, in rest of the country, housing turnover will either continue to rise or stay roughly unchanged over the coming year, the poll showed.

"The rise in home prices over the last few years is likely to contribute to more speculative behavior, which leads to higher turnover," said Diana Petramala, economist at TD Securities.

However, the majority of poll respondents said they do not expect the federal government to take further action to cool the housing market.

"There is no evidence that the policies have been effective in cooling the housing market," said Jean-Paul Lam, professor of economics at the University of Waterloo. "The market is still riding on low interest rates, low supply in certain cities and a fairly stable labor market for now."

For poll data see

(Other Reuters poll stories on housing markets:)

(Editing by Ross Finley and Meredith Mazzilli)

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