Are all the credit rating agencies ganging up on Canadian house prices now?
Moody’s is the latest, with a ‘stress test’ case of a nationwide 44% drop in house prices.
The “variable” analysis assesses how much current house prices have departed from “sustainable” market fundamentals. The assumption is that, in the event of a severe economic shock, expected demand that has been baked into current house prices will not materialize. In Canada, the growth in house prices over the past 10 years has ‘’far outstripped” the growth in incomes, according to Moody’s.
“Think of it like an elastic [being stretched],” explains Mr. Connor of National Bank Financial. “The snap back is going to be a lot harder.”
This is the first article we’ve seen recently that seems to point clearly to what would cause the price drop: the simple fact that prices are too high.
Such a house price decline, were it to happen, would be driven primarily by the phenomenal upswing in Canadian home prices over the past decade, Moody’s said.
Canada joins Spain, as well as the United Kingdom and Australia, in the ratings agency’s assessment of countries where growth in housing prices over the past 10 years has driven their values away from sustainable market fundamentals and into “overheated” territory.
“As with Australia, Spain and the U.K., we expect house prices in Canada to suffer the most due to the misalignment of current house prices with historic fundamentals,” Moody’s said.
Read the full article in the Financial Post.