Canada's housing market appears to be 'teetering on the brink of a downturn'

Canada’s housing market keeps chugging along, and real estate watchers are becoming increasingly worried.

Home sales in the Vancouver metro area rebounded by 22.8% in May, the third-highest for the month on record. Notably, demand has shifted from single-family homes to condominiums and townhouses.

Meanwhile, home sales in the Greater Toronto Area fell 20.3% in May, according to the Toronto Real Estate Board. But, at the same time, prices kept climbing in the region: the average selling price for properties was 14.9% higher than in April.

Canada’s home price index rose 0.8% month-over-month in April, the highest increase since May 2016. That came in above expectations of up 0.3% and followed the 0.2% uptick the prior month. Toronto saw prices rise 2.1% and Vancouver saw an increase of 1.2%.

“All things considered, the housing market appears to [be] teetering on the brink of a downturn, which is a bad sign for GDP growth prospects,” David Madani, senior Canada economist at Capital Economics, argued in a note.

“Although Vancouver home sales have rebounded in recent past months, we doubt that resurgence can be sustained in the new tougher regulatory environment,” he explained. “Meanwhile, the slowdown in Toronto’s much larger housing market has gone from bad to worse, with a correction in house prices coming soon.”

On Thursday, the Bank of Canada released its semi-annual Financial System Review, in which it warned that a correction in either Toronto or Vancouver’s housing markets are key risks to Canada’s economy. It stated there’s a “moderate” chance that such a correction could happen.

Moreover, t
he continued appreciation of home prices could also pose a challenge to Canadian banks if there’s a “severe” economic shock, according to Fitch Ratings.
Specifically, the ratings agency said banks with more mortgage exposure to either the greater Toronto or Vancouver areas could be more sensitive to swift market corrections in those markets.

“Home price growth in Toronto and Vancouver is outpacing fundamentals,” said Doriana Gamboa, senior director, Fitch Ratings. “[M]ost Canadian banks should be able to withstand a market correction, but in the event of an adverse unemployment shock or rapid rise in interest rates, banks could be more heavily impacted.”

“Recent attempts by federal, provincial and local governments to cool the housing market through various measures, so far have not dampened prices and risks may escalate for banks, though given healthy capital levels a modest correction would be manageable,” added Gamboa.

NOW WATCH: A Stanford neuroscientist reveals something ‘puzzling’ in people who are extremely successful

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.