Bank of Canada says house price increases in Vancouver, Toronto likely unsustainable

The Bank of Canada warnsit is unlikely that the current pace of housingprice increases in the Vancouver and Toronto areacan be sustained.

The central bank made the comment Thursday in releasing its latest biannualreview of risks posed to the Canadian financial system.

"[Housing market] supply will be somewhat more elastic in the long term, and it is unlikely that demand fundamentals will justify continued strong price increases," the bank said.

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During a question-and-answer session with reporters,Bank of Canada governor Stephen Poloz cautioned thatprospectivehomebuyers,and their lenders,should not extrapolate recent price increases into the future when they are weighing whether to buyproperty.

"If prices are going up because people expect prices to go up, then that, of course, is probablyunsustainable...," Poloz told reporters. "And so those expectations will not be realized longer term."

"So that raises significant risks ... in the household sector," he added.

The bank noted that year-over-yearprice growth in Vancouver reached 30 per cent in May, and 15 per centin Toronto.

While prices in those two red-hot markets have soared, the bank contrasted that withthe oil-producing provinces, where home sales remain low and prices are ebbing.

"In the rest of Canada, most markets appear well balanced and price growth is modest. Overall, the vulnerability associated with housing market imbalances has moved higher."

TD Bank economists said the Bank of Canada is not the first to sound the alarm bells on Toronto and Vancouver housing, as CMHChas made similar announcements.

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"TD agrees with the Bank of Canada's warnings and expects that home prices to lose some steam next year as rates begin to tick higher and overvaluation in key market weighs on demand," said Leslie Preston, a senior economist at TD.

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The comments from Poloz and the Bank of Canada come a day after Finance Minister Bill Morneau said the federal government was doing a "deep dive" on the housing market as it decides whether more changes are needed to rein in escalating prices or curb the impact of foreign investment on housing affordability

Debt risks

The bank also said high levels of Canadian household debt poseanother threat to the financial system.

In areas with rising home prices, low interest rates and readily available credit are pushing up debttoincome levels. Meanwhile,in areas hit by those low commodity prices, job losses have boosted the financial strainon some highly leveraged households.

Despite the central bank's warnings on household debt and the housing markets,it saidit viewed the overall risk levelto the Canadian financial system as unchanged since its last report back in December.

"While household vulnerabilities have moved higher, the ongoing economic recovery in Canada means that the overall risk remains the same."

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