Photo: James Bombales

On the heels of new regulations that tighten up the mortgage underwriting and qualifications process, Fitch Ratings is predicting that Canadian home price growth will decline in 2018.

Overall, home price growth is slated to drop to 5 per cent in 2018 from roughly 10 per cent in 2017, according to the US-based credit rating agency’s 2018 Global Housing and Mortgage Outlook, published earlier this week.

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Fitch attributes the decline to the Office of the Superintendent for Financial Institutions’ (OSFI) new stress test, which came into effect on January 1. The test requires all uninsured mortgage borrowers to qualify against the Bank of Canada’s five-year benchmark rate, or at their contract mortgage rate plus an additional two per cent.

“The more restrictive guidelines should help protect against future defaults among new borrowers and temper home price growth,” says Fitch in the report.

“Barring an unexpected shock, a mild correction in prices could be likely if the actions taken to date have the intended effect,” adds Fitch.

In addition, home prices in Canada’s major markets are at risk of a severe correction in 2018.

Fitch says both Toronto and Vancouver have experienced home price increases of nearly 50 per cent since the start of 2015.

The credit rating agency acknowledges that supply constraints may be a factor influencing the markets’ extreme price growth but “it does not explain the whole picture.”

“Underlying fundamentals are strong, but the extent of the price increases do not appear to be fully supported by the growth trends in population, income and employment,” says Fitch.

Although provincial governments in both markets intervened with policy meant to ease home prices, including foreign-buyer taxes, there might be reason to believe that the impact could be temporary.

In August 2016, the BC government implemented a foreign-buyer tax for Metro Vancouver, which immediately cooled home price growth in the market. However, in early 2017 prices began to rebound.

“If home prices continue on the current upward trajectory, these housing markets [Toronto and Vancouver] will become increasingly vulnerable to an unexpected shock and severe correction,” says Fitch.

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