August 31, 2016
Banks Are Worried About Toronto and Vancouver Home Prices
It is more expensive than ever to buy a home in Canada – a fact that is causing our nation’s biggest banks to fret. Fresh stats on home price appreciation are out along with lenders’ earning reports, which underscore the size of risk the housing market poses to banks’ bottom lines. According to statements released by RBC, TD and Scotiabank this week, they don’t paint a pretty picture. Here’s what the big banks have to say about Toronto and Vancouver home prices – and what buyers, sellers and homeowners should be aware of.
Royal Bank of Canada: Affordability Hits a 6-Year Low
RBC’s Housing Trends and Affordability report, issued this Tuesday, has found home affordability in Canada has decreased at the highest pace in six years. The bank’s index, which is based on household income compared to home costs, hit 42.8% across the country in the second quarter (the higher the percentage, the lower the affordability).
But it’s not a bad news story in all of Canada’s markets – some, like Calgary, Saint John and St. John’s actually improved in affordability. Rather, hot market juggernauts Vancouver and Toronto have dragged down the national average with too-hot-to-handle price growth in 2016. Vancouver’s measure has reached “uncharted territory” says RBC, with an “astounding” 90.3%. Meanwhile Toronto’s affordability is the worst in 25 years at 60.2%.
RBC CEO David McKay also stated last week on a call to investors that the bank is closely monitoring the two markets for signs of trouble, and has protected itself with thorough underwriting practices.
However, there may also be some relief on the horizon; the bank notes that resales had started to drop in Vancouver even before the new 15% foreign investor tax was implemented, and that prices there and in Toronto may cool a bit next year. “Signs of cooling resale activity have emerged in Vancouver and more tentatively in Toronto and we believe the blistering pace of property appreciation in both markets may slow by year end,” said Craig Wright, RBC chief economist. “This likely won’t help affordability in the near-term because of demand-supply tightness in the two markets at the present time, but some relief could arrive late this year or early in 2017.”
TD: Markets Are Moving in Opposite Directions
While TD agrees that Vancouver may finally be in for a bit of a slowdown later this year, it doesn’t agree that anything will stop Toronto’s momentum. “Toronto has more room to accelerate over the near term. Barring the levying of a similar tax, foreign investors could switch focus to the more affordable Toronto market,” stated the bank in a report published this week.
TD is also calling for as much as a 10% price correction in the Vancouver market by 2017 before stabilizing at those levels (though it should be noted they’ll still be at historical highs by that point).
The bank has a more optimistic outlook for the country as a whole, saying it will “bet on a sustained soft landing in both markets – and in Canada by extension – over the next two to three years.”
“To the extent that bond yields fail to track higher, policy-makers may need to consider other alternatives to rein in the Canadian housing market,” stated TD’s report.
Scotiabank: Pulling Back on Mortgages
Scotiabank, meanwhile, is taking more drastic measures to protect its business from the volatile market. It announced this week that it will be purposely reducing the amount of mortgages it provides due to worries over Toronto and Vancouver home prices.
Scotiabank Executive Vice President of Canadian Banking James O’Sullivan, said that pulling back from the mortgage market is “very much a choice” while on a call with investors.
“We have been taking progressive action across a number of (mortgage) portfolios. We’re tightening exceptions, tightening organizations and reducing pre-approvals.”
Are you concerned about price growth in Toronto and Vancouver? Let us know in the comments!