June 15 (Bloomberg) -- Bank of Canada Governor Mark Carney said housing prices in some parts of the country are reaching “severely unaffordable” levels, reinforcing the need for Canadian authorities to remain “vigilant” against a correction.
Carney reiterated the bank’s forecast that Canada’s housing market will cool as part of an economic “rebalancing,” in which business investment and exports will take over from consumers and governments as engines of growth. He said some parts of the housing market, such as Vancouver, may be rising to “extreme” valuations driven by fear and greed, rather than supply and demand.
“The risk is that expectations become extrapolative, prompting the classic market emotions of greed and fear - greed among speculators and investors, and fear among households that getting a foot on the property ladder is a now-or-never proposition,” Carney, 46, said in the text of a speech he’s delivering today in Vancouver, a city where housing prices rose 26 percent in May from a year earlier, the Canadian Real Estate Association said today.
The central-bank governor restated his forecast that economic growth in Canada is slowing to a “modest pace,” weighed down by temporary factors such as supply-chain disruptions in the auto sector and rising energy prices that are curbing consumer spending. Growth should pick up in the second half of the year, he said.
“Canadian authorities will need to remain vigilant as they have been in the past to the possibility of financial imbalances developing,” Carney said.
Carney reiterated the bank plans to “eventually” raise its benchmark rate from 1 percent, where it has stood since September. He reiterated that any increase will be “carefully considered,” using language from earlier announcements.
Carney said housing prices have risen 31 percent nationally from their bottom in early 2009, and are now 13 percent above their previous peak before the global recession. He attributed the rise partly to “cheap credit” made available by low interest rates.
The bank estimates the proportion of Canadian households “highly vulnerable” to an economic shock has increased to its highest level in nine years. Canadians are now as deep in debt as Americans and the British relative to their incomes, he said, adding that “households will need to be prudent in their borrowing, recognizing that over the life of a mortgage, interest rates will often be much higher.”
He also said that housing-related debt is the “single largest exposure” for Canadian financial institutions.” Real- estate loans make up over 40 percent of the assets of Canadian banks.
“Any housing excesses could generate important vulnerabilities in the financial system,” he said.
Carney said certain regions and market segments could be more vulnerable than others, referring to the possibility of an “overshoot” in the condominium market in major cities. He said the average selling price of a home in Vancouver now stands at nearly 11 times average family income, a multiple on par with Hong Kong and Sydney.
“Such valuations are extreme in both Canada and globally,” he said.
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