Canadian financial institutions: Higher interest rates could send home prices plummeting by 20% in some areas

Canada’s federal bank regulator has described the housing market as in the latter stages of a “speculative fever” and warned that prices could plummet by as much as 20 per cent in some places.”Real estate speculation is taking over The market right now, and that’s what’s happening,” Said Peter Routledge, head of Canada’s Financial Institutions Regulator, on The latest episode of David Herle’s weekly podcast The Herle Burly.Looking ahead, we are now in the latter stages of this phase.My expectation is that, assuming interest rates do rise this year, the heat will abate a bit and you’ll see prices slow down.”Routledge, a former Analyst at National Bank who was appointed to lead OSFI last year, described the stunning surge in house prices during the pandemic as a perfect storm.Thanks to the rise in house prices over the past decade, many households have a lot of equity;Canada has a low default rate, which reduces risk for lenders;As house prices rise steadily, a “herd mentality” kicks in;The Bank of Canada cut its benchmark lending rate to virtually zero.Routledge said the housing market will cool, and some may even correct, as speculation subsides.”In some markets where prices are rising rapidly, you might see a 10 percent or even 20 percent decline,” Routledge said.However, regulators of financial institutions do not believe that the expected sharp price declines in some cities pose a threat to Canada’s financial system.Toronto and Vancouver, where prices are highest, have experienced similar declines before.”Those cities also saw a 20 percent peak-to-trough decline between 2015 and 2017, so we can afford that kind of price volatility,” he said.Canadian home prices have been setting records for much of the past decade, led by increases in Vancouver and Toronto.In this outbreak, the craze has spread to other cities because of the greater need for large areas of housing.That led to toronto-style price increases in places like Ottawa, Montreal and Moncton, New Brunswick.Investors took notice and used it to profit.Routledge says a “speculative boom” in housing has added extra heat to the market.Investors typically account for about 15% of home sales, but now they account for about 22% of sales, he said.”Even though it may seem like a little bit, it’s a pretty significant incremental demand for real estate transactions,” Routledge said.Investor interest in the housing market may be about to fall, he said: “as interest rates rise, as is widely known to the ‘oh my god, the value of housing has been finished, I’m sure you temporarily not in the real estate market to get the expected return…… I think a smart investors will think twice before you do, may see other investment options.”

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