Canadian Housing Prices Are Slowing Down: 3 Reasons to Worry

There’s been troubling news from Bank of Montreal (TSX:BMO)(NYSE:BMO) and the Canadian Real Estate Association.

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It appears as if the party is over.

Up until today, the statistics have been daunting. Compared to 2015 levels, the Vancouver area saw average home prices increase by 25% with the median selling price topping $1 million. This year, Royal LePage expects Vancouver prices to rise a total 27% along with a 15% rise in the Toronto market.

“I believe it is the highest value put forward by a serious forecasting agency since the turn of the century,” said Royal LePage’s CEO.

New data suggests that home prices are increasing at a slower rate, if at all.

Here’s why you should worry.

1. Canada’s economic hubs are ripe for disaster

When the oil rout hit, Canada’s economy was buoyed by less-exposed cities such as Vancouver and Toronto. With the help of rising real estate prices, those two metros a were bright light in an otherwise bleak Canadian landscape.

Those bright lights are starting to dim.

According to the Canadian Real Estate Association, sales of existing Canadian homes fell in August–the fourth straight month of volume declines. The drop–the largest monthly decline in two years–was preceded by a tax on foreign buyers in Vancouver.

“Single family homes sales were already cooling before the new land-transfer tax on foreign home buyers in Metro Vancouver came into effect,” said the chief economist of the Canadian Real Estate Association. “The surprise announcement of the new tax caused sales to brake hard.”

Areas such as Alberta and Saskatchewan are still experiencing housing price declines. Adding Ontario and British Columbia to that list will create a heavy weight on the overall economy.

2. Things aren’t looking better for 2017

With its announcement, Canadian Real Estate Association also trimmed its forecast for 2017, projecting a 0.6% decline in national sales and a 0.2% drop in prices. In June, it had forecast sales to rise 0.2% and for prices to rise 0.1%.

This reversal could be catastrophic.

According to Bank of Montreal (TSX:BMO)(NYSE:BMO), the rapidly rising real estate market will end poorly for consumers, lenders, and the economy as a whole. “Odds are that if this kind of price growth continues, it will end badly,” a bank analyst said in a research note.

3. Canadians can’t afford a downturn

To afford the seemingly inexorable rise in housing prices, Canadians have become desperate.

This year, Bank of Montreal found that almost one-quarter of Canada’s citizens are still living paycheque to paycheque. Roughly 25% of respondents said they had hardly anything set aside, and more than half reported having less than $10,000 in emergency funds. Almost one-third of first-time home buyers reported that they borrowed money from close acquaintances to help afford their down payments.

If real estate prices do indeed start to fall nationally, prepare for a systematic impact across Canada’s economy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ryan Vanzo has no position in any stocks mentioned.

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