Real estate prices in Canada are rising to unsustainable levels as household budgets are increasingly stretched. That is the view of a leading Canadian economist who believes that property prices in the country may have to fall significantly over the next three years as debt levels rise.
Low interest rates pushing up property prices
Property prices in Canada have been rising as low interest rates encourage more and more Canadians to buy. Overseas property investment is also helping the Canadian property market, with Chinese investors particularly keen to buy property in such a stable economy.
Whilst many economists believe that increasing prices is a good thing, others are concerned about the rising levels of household debt.
The International Business Times reports that Canadian economist at Capital Economics, David Madani, believes that house prices in the country may decrease up to 25 per cent in the next three years. This is because property prices have risen to around 5 and a half times the average worker’s disposable income, well over the long term average of 3.5 per cent.
Whilst property prices may be set to fall, economists do not believe that Canada will mirror the problems experienced by their neighbours, the USA. Canada has a more robust labour market, a stronger economy and tighter mortgage lending regulations. Indeed, the fourth quarter of 2010 saw GDP in Canada rise 3.3 per cent whilst unemployment has almost reduced to pre recession levels.
Rate rises may squeeze household budgets
The Bank of Canada interest rate is currently around 1 percent; very low for the country. Economists are therefore concerned that should interest rate rise, Canadians with high levels of debt may struggle to maintain their mortgage repayments. A recent survey found that about 18 percent of Canadians would struggle to pay their mortgages if their payments increased.
