The outlook for Canada’s housing market is “unsustainable,” and in the same category as Greece and Singapore, according to a new report from Fitch Ratings. 

Housing market conditions in 19 of the 22 countries covered in the report were rated as either “stable or “stable/positive.” Only Canada, Singapore, and Greece were given a negative outlook. “Canadian home prices are not supported by underlying fundamentals and the risk of a price fall in over-valued markets has risen,” the credit rating agency’s report said.

The report was issued a day after Bank of Montreal Chief Economist Doug Porter released an analysis which concluded the housing markets in Toronto and surrounding communities are in a bubble.

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BNN speaks with Doug Porter, chief economist at BMO Capital Markets, just after he releases a report that declares the Toronto housing market is in a bubble.

Low interest rates and foreign investment have pushed home prices in Toronto and Vancouver up by about 16 and 25 per cent respectively since 2014, wrote Fitch.  “Despite the continued rise, Fitch views current home prices as unsustainable in the long term. There is a heightened risk of a price correction in over-valued markets.”

Ottawa has imposed tightened mortgage lending rules and imposed new stress tests on mortgages backed by the federal government.  British Columbia has also imposed a new tax on foreign home buyers. Those moves should help to cool Canada’s hot housing market, according to the report. “With local and federal governments tightening loan-eligibility requirements and imposing restrictions on certain buying segments, the pace of home-price growth should decelerate.”

The staggering price increases have made housing in markets such as Toronto and Vancouver increasingly unaffordable, Fitch said. Canadian household debt is now 168 per cent of disposable income, and for the first time ever is now larger than Canada’s total GDP. The debt-to-income ratio is also larger than comparable figures in either the U.S. or UK. 

Higher mortgage down payments and tougher underwriting standards should help to stabilize the housing market, even if it results in higher mortgage costs for borrowers, the report said.  “The cumulative effect of these changing dynamics on home prices is likely to be negative, but is yet to be determined as these steps are unprecedented.”

The ultimate impact of tighter mortgage rules remains to be seen, but Canada’s mortgage business is expected to remain robust, said Fitch. “We expect that it will result in fewer loans being made available to marginal borrowers, which could reduce loan growth. That said, we anticipate loan volumes to remain near historical highs as long as interest rates remain low, [and] employment is stable.”

Canada’s housing market continues to be fueled by low interest rates and stable employment – and there are no indications that will change anytime soon, Fitch said.