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Just a month ago, industry experts seemed relatively pleased with the direction the Canadian housing market was heading in — home sales and prices were rising at a moderate clip, after months of slumping activity. But now, things may have started to change.

This week, new reports on high household debt levels and falling home prices have given some industry watchers pause, as the current rising interest rate environment could exacerbate both issues.

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For a closer look at some of the issues facing the market this month, Livabl has rounded up the latest expert commentary to keep you in the know.

Household debt is on the rise

The second quarter of 2018 saw an uptick in household debt, in a country that already has some of the highest debt levels in the world

Rising interest rates have made the picture even more precarious, according to the latest report from the Canada Mortgage and Housing Corporation (CMHC). The ratio of debt-to-disposable income rose three percent in both Toronto and Vancouver in the second quarter, from 239 and 205 percent to 242 and 208 percent, respectively.

“With interest rates on the rise, highly indebted households could see their increased required [mortgage] payments exceed their budgets,” reads the report from the federal housing agency. “Highly indebted households have usually few debt consolidation options to respond to increasing debt services costs.”

The Bank of Canada hiked the overnight rate to 1.75 percent in October, triggering a corresponding rise in mortgage rates. As rates continue to climb in 2019, Canadians could begin to struggle to make their monthly payments.

“It is a vulnerability that has to be closely watched should interest rates continue to move higher,” writes Brent Weimer, CMHC’s senior housing researcher, in a statement.

New construction facing new headwinds

The Canadian new construction market has been posting solid numbers throughout the fall — but that could be about to change.

“On a trend basis, housing starts appear to have troughed, with some upward momentum of late,” writes Fotios Raptis, a senior economist with TD, in a recent note.

Housing starts provide a way to track the health of the new homebuilding market, while measuring the growth of new housing supply. And, according to Raptis, they could plateau in the new year, thanks to series of policy measures introduced in 2018.

“Going forward, higher interest rates and affordability constraints in major [markets] (GTA, Greater Vancouver Area) could act to hold the pace of new residential construction,” he writes.

But a steep drop off in starts doesn’t appear to be in the cards — ultimately a strong demand for new housing will keep the numbers in the green in 2019.

“A steep downturn in homebuilding nationwide appears unlikely,” writes Raptis. “Canada’s population is on the rise, medium-term income growth should remain healthy, and most markets are generally not overbuilt.”

Home prices are falling

It was another month of sliding home prices for the national housing market in November. The Teranet-National Bank Composite National House Price Index fell 0.3 percent, following a 0.4 percent drop in October.

“Home price weakness in some major metropolitan areas is evidenced by a second consecutive decline in the national Composite Index,” writes Marc Pinsonneault, a senior economist with the National Bank, in his most recent analysis.
According to Pinsonneault, stricter mortgage qualification rules and higher interest rates are to blame for what he deems a “significant” cooling of demand across the country.

“For instance, in Vancouver, November was a fourth month in a row without a rise in home prices, for a cumulative drop of 1.8 percent,” he writes. “In Toronto, prices declined over the last three months, for a total loss of 0.4 percent.”

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