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Fitch latest to call housing pullback

HomeSalesLRG_V2
Tags: Real Estate
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Another day and another prediction that Canada's hot housing market is cooling down.

This time its ratings agency Fitch, which says recent sales figures from the Canadian Real Estate Association (CREA) are evidence of early signs of a "cooldown" in Canada's housing market.

"In Fitch Ratings' view, these early signs of a cooldown in the housing market could be generally positive for the stability of the Canadian banking system and the sustainability of economic growth, though the full extent and pace of the housing correction remains unclear," the agency says in a report.

But Fitch says the pullback in home sales could be a "positive development" for Canadian banks as long as the labour market remains stable.

"Household indebtedness, driven by mortgage credit expansion, is the main threat to the credit risk profiles of Canadian financial institutions," Fitch says. "The latest sales numbers provide some initial evidence that risks of near-term overheating in the Canadian housing market may be subsiding."

Fitch expects earnings growth at Canadian banks to "moderate", but profitability will remain at "sound levels" due to the banks' diversified business mix.

The ratings agency says that while a worsening in household credit quality and higher loan losses could increase default and delinquency rates in the banks' mortgage portfolios, the impact could be mitigated in part by government-backed mortgage insurance.

"While not Fitch's base case, such a scenario could derail the government's fiscal consolidation plan," the report adds.

The ratings agency adds that a slowdown in the housing market and construction will have a negative impact on economic growth in the near-term.

It also says the "near-term risks" of a housing bubble will ease the pressure on the Bank of Canada, which has repeatedly warned Canadian households about their high debt levels and hinted that its next move will be an interest rate hike.

Fitch is not alone in its predictions of a slowdown in the housing market. David Madani, an economist at Capital Economics and long-time bear on the Canadian housing market, earlier this week predicted home prices in Canada are set to fall by as much as 25 percent over the next two years.

He believes that correction will have a major impact on the Canadian economy.

"For several years Canada's economy has outperformed other developed economies, thanks mainly to a stable banking system and a resurgent housing market. The tide, however, has turned and Canada's domestic economy is likely to succumb to a slumping housing market," he said in a note to clients.

TD economist Sonya Gulati says that a correction is taking hold in the housing market, but higher interest rates are needed to eliminate the risk of a major housing bubble.

On Monday, CREA said home sales fell 5.8 percent in August from July -- the sharpest month-over-month decline in nearly two years -- and were down 8.9 percent from the previous year.

CREA also cut its forecast for next year and halved its expectations for the rest of 2012, citing a pullback due to new mortgage rules put in place by Ottawa over the summer. The rules shortening the maximum mortgage amortization period to 25 years from 30 years and lowering the amount homeowners can borrow against their house to 80 percent from 85 percent, among other changes

For 2012, the association now expects sales to rise 1.9 percent -- down from the 3.8-percent increase it forecast in June. And next year, it expects sales to decline 1.9 percent in 2013, sharper than its previous forecast of 1.1 percent.

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