It’s also close to the levels seen in early 2007, when it was 26,” said Sleptsova. “We worry that the number of countries in the high-risk categories (scoring above 4 27 countries) is much higher now than the historical average. On Oxford’s banking sector balance sheet scorecard below (10 is the highest risk) Canada comes in second, with indicators such as household credit as a percentage of GDP registering the highest possible risk score. Others are Sweden, the Netherlands, Australia, Ireland, Germany, Russia and Hungary. Oxford includes Canada among the countries where a weak housing market may aggravate existing weaknesses in the banking sector. Whether or not this develops into a banking crisis, depends on the health of the banks’ balance sheets, said Sleptsova. Once prices start to fall there is the risk of a negative feedback loop in which tightening credit supply exacerbates the housing downturn. Its analysis finds that most crises are preceded by on average eight quarters of falling real home prices. In other words, the higher they fly, the harder they fall.Ī decline in prices after a period of excessive growth has historically been a key trigger of housing crises, said Oxford. “Historically such sharp falls in property prices have been a precursor to housing and wider banking crises,” it said. Having risen by 47 per cent between March 2020 and March 2022, real house prices fell for nine months in a row up to December and were 19 per cent down from their peak in Q1 2022,” said the report. “Canada’s housing market, after years of overheating, is already in crash territory. Nearly half of that increase was in 2020-21 during the pandemic, when prices rose at their fastest pace in 50 years.Īs central banks such as the Bank of Canada swiftly raised interest rates to battle soaring inflation housing markets fell into steep downturns. Oxford says real housing prices rose by 36 per cent between 20, an increase equal to that seen in the run-up to the great financial crisis. The housing booms in advanced economies were fuelled by a long period of ultra-low interest rates. The risks appear to be highest in advanced economies, said Oxford senior economist Evghenia Sleptsova, as households in emerging economies are less indebted and their housing markets experienced less of the boom and bust. A housing market that overheated during the pandemic when borrowing rates were low and now a steep decline in property prices and credit now that interest rates have climbed, in Canada’s case by as much as 4.25 percentage points. Photo by Oxford EconomicsĪll of these markets share two things in common. The area's population was increasing largely from new immigrants and foreign students, and now pandemic-era low rates have poured gasoline on those fires.Canada, along with Iceland, the Netherlands, Sweden and Denmark, is among the five most vulnerable with a 7 per cent probability of this leading to a banking crises within the next year and 18 to 20 per cent chance in the three to five years.Ĭanada is among the five most vulnerable of a housing crash leading to a banking crises, according to Oxford Economics. Though he lives in Ottawa, Moffatt hails from southwestern Ontario and he says affordability issues were a problem there even before the pandemic because of supply and demand issues. Some smaller towns an hour or more outside the orbit of large urban centres are faring better in real estate than some big cities. If it were just cheap lending, markets should be heating up fairly evenly across the country. Pandemic exacerbated pre-existing problemsĮconomist Mike Moffatt, senior director at the Smart Prosperity Institute, an Ottawa-based think-tank, says low mortgage rates are key to what's happening, but they're not the only factor. Underpinning the frenzy are record low interest rates, which are lower than they've ever been, built on the back of Canada's central bank slashing its lending rate to practically zero to stimulate the economy out of COVID-19. Analysis How long can interest rates stay low once a vaccine arrives?
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