Banks now wary of housing industry in a change of heart

Recent statements from banking executives reflect a drastic departure from their optimism regarding Canadian real estate just a few years ago

Banks now wary of housing industry in a change of heart
Canada’s banking industry has sounded the alarm on the burgeoning debt that is currently plaguing the country’s housing industry, in a sharp departure from its earlier stance of confidence in the sector’s stability.
In a Maclean’s article by Chris Sorensen, CEOs and chief economists of the largest banks have recently expressed concern about the out-of-control affordability crisis in Canada’s real estate segment, after these institutions have funnelled huge sums into the industry over the past few years.
“We’re a little concerned about housing prices in the Greater Vancouver area and Toronto,” Scotiabank CEO Brian Porter said right after the most recent release of the bank’s financial results.
The statement stood in stark contrast to Porter’s statement just two years ago, when he said that “‘bubble’ is perhaps the most overused word since the global financial crisis,” despite the fact that single detached homes in Vancouver were already going for an average of $1 million.
“It no doubt has much to do with Vancouver detached-house prices surging by 37 per cent in the year to this May, and Toronto’s soaring by a still ear-popping 15 per cent,” Sorensen wrote in his analysis. “Those sorts of gains are unsustainable and suggest investor euphoria—the always-dangerous ‘fear of missing out’—has firmly taken hold.”
“Yet, while Scotiabank says it voluntarily curtailed its mortgage business, leading to flat growth in the most recent quarter, it’s unlikely to pull back on the reins too hard for fear of losing market share to competitors and leaving money on the table,” he added.
Sorensen noted that while price growth—which has stood unchecked by both banks and the government for the past few years—has by and large benefited the sellers’ side, it’s a development that has no legs to stand on in the long run.
“The flip side of all those big property value gains is unaffordable housing and overly indebted families. A study last year by the C.D. Howe Institute suggested that one out of every 10 mortgage-indebted households in Canada was ‘extremely vulnerable’ to an economic or financial shock—a figure that’s likely only increased since,” he stated.
“At the same time, there are concerns a housing bubble could do immeasurable damage to the Canadian economy if it bursts, since homeowners who suddenly find themselves underwater on their mortgages would dial back spending elsewhere,” Sorensen concluded.