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National Bank says hot foreign money could turn cold

In case you missed it: National Bank Financial is sounding the alarm over the hot foreign money that’s helping push Vancouver and Toronto home prices out of reach for many, warning a correction is coming for Canadian real estate.

Financial services analyst Peter Routledge has been cautious on Canadian housing for a while now. But his tone darkens in a note Wednesday on domestic banks, writing “unfortunately, we are bears when it comes to the Canadian household.”

Canadians are carrying record credit-market debt, $1.89 trillion in the third quarter, according to Statistics Canada. Mortgage debt makes up $1.23-trillion, or 65 percent, of that number.

Routledge says he accepts the Bank of Canada’s estimate that housing is potentially overvalued by 10 to 30 percent. That implies “many Canadian households are over-leveraged and will ultimately default in order to reduce this leverage, at a magnitude underappreciated by the market.”

The “regime” in place for some time, he notes, has been rising home prices and growing home equity. But Routledge tells BNN a regime change is coming, meaning a correction for real estate prices – with Vancouver hit harder than the rest of the county.

A chief concern is Chinese policy on foreign capital outflows. Some of that money comes to Canada, and “much of it finds its way into the housing markets of Vancouver and Toronto.”

With news that yuan outflows intensified in December and January, both markets could see further price appreciation.

But, Routledge warns at some point “in the near future,” China will take steps to stem the outflow:

  • Either by devaluing the yuan
  • By bringing in draconian capital controls
  • Or both

That would remove the so-called “price-insensitive” buyer from Vancouver and Toronto.

“Our concern is that this ‘hot’ stimulus could abruptly turn ‘cold’ and force the price of homes in those two cities down,” he writes.

Canada’s weakening terms-of-trade is also a concern. Routledge says, in the simplest terms, we trade barrels of oil for smartphones – and a barrel of oil now buys fewer smartphones than it did in 2014.

Why shouldn’t that terms-of-trade shock flow through to home prices, he asks.

Overall, Routledge says “we believe house prices and, therefore, household debt will fall to levels much more in line with underlying household income.”

That would be a big come down for Canada’s two hottest markets. In Vancouver, median home prices are 11 times median household income. In Toronto, the number approaches seven times.

A multiple of three and below is considered affordable.

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