NEW YORK--(BUSINESS WIRE)--A new tax meant to slow home price growth in Vancouver will likely be effective in tamping down buyer activity, Fitch Ratings says. However, the recent decline in the number of sales suggests that the city's market may have already begun to cool and is increasingly vulnerable to price declines if there is a rise in the unemployment rate.
The growth of residential prices in Vancouver has resulted in affordability issues for many residents. Teranet Inc. data from July 2016 showed that the average house price in the city had risen by 24% since the previous July and is now in excess of C$900,000. The provincial government estimated that, between June 10 and July 14, 7.9% of total investment was from foreign nationals (in Canadian dollars). In an attempt to slow price appreciation, Vancouver assessed a 15% property transfer tax on properties purchased by foreigners, which began on Aug. 2.
The tax is part of a broader effort to slow the country's housing markets. Last year, the minimum down payment on loans insured by Canada Mortgage and Housing Corporation was increased to 10% on the portion of the loan over C$500,000. This June, the finance minister announced the formation of a working group that will make recommendations designed to increase affordability and bolster the market's stability.
In our view, these measures might slow price appreciation. However, some cooling in the market may have already begun. Canadian Real Estate Association data indicated that the number of national sales fell by 2.9% since last July. Vancouver's monthly sales have declined substantially by 21.5% since they peaked in February. While there is no direct relationship between the number of sales and prices, we believe declines in the number of sales of high magnitudes are worth consideration.
We believe there is some risk to residential house prices in Vancouver if there is a rise in unemployment. The city's job market has been strong. Statistics Canada reported that Vancouver added 83,500 jobs over the prior year. Its unemployment rate fell to 5.5%, the lowest rate in the country. However, Canada's other major metropolitan areas have seen much slower growth. In July, Ontario's unemployment rate was unchanged at 6.8% and Montreal's stood at 7.9%.
Fitch currently estimates home prices to be more than 20% overvalued nationally in Canada when compared to growth in long-term economic fundamentals, leaving markets increasingly exposed to downside risk. Fitch expects to publish updated overvaluation estimates for all major metropolitan areas in Canada by the end of 2016.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.