The rate of Canadian home price increases should slow in 2017 as home purchases become increasingly expensive relative to household income and rents, Fitch Ratings says. The deceleration in US home prices rises will be less dramatic, although some submarkets are overheated, and we think shifts in the pattern of mortgage lending could present future risks to US mortgage performance.

Low rates and foreign investment fuelled Canadian price rises in several key markets in 2016, primarily driven by growth in the Toronto and Vancouver markets, which have both increased over 30% in the past three years.

Fitch views current Canadian home prices in those two markets as unsustainable in the long term and not supported by fundamentals. As a result, there is a heightened risk of a price correction in overvalued markets. Vancouver has already seen a decline in prices in recent months. With local and federal governments tightening loan eligibility requirements and imposing restrictions on certain buying segments, the pace of home price growth should slow to around 3% nationwide in 2017, down from 12% last year. Eligibility requirements for Canada Mortgage and Housing Corporation (CMHC)-insured mortgages have tightened and may be included for non-CMHC insured loans. This should temper lending to borrowers qualifying for loans primarily due to the low periodic payments required.

US home prices are on track to record a 5% nominal gain for the third consecutive year in 2016, returning prices to their highest level since 2006 and up more than 30% from their low in 2012. Fitch forecasts only a slight slowdown, to 4%, in 2017. The rate of growth has been uneven, with areas in the Western regions experiencing much more rapid growth than areas in the Northeast. For example, prices in California, Arizona, Nevada and Washington have increased over 50% since 2012, while average prices in New York, New Jersey and Massachusetts are up less than one-half that figure over the same period.

Overall, US home prices are well supported by demographic and economic trends. However, a lack of underlying fundamental support appears to have set into some US submarkets as well. Markets in the West and major cities in Texas, Nevada and Arizona appear to have overheated. Mortgage rates rose following US President Donald Trump’s election and the Fed tightening policy interest rates. Less refinancing will depress US origination volumes in 2017. We forecast a 15% fall in gross new lending.

Nonbank lenders accounted for the majority of loans originated in the US for the first time in 3Q16, reflecting their higher risk appetite compared with banks. The performance of mortgages originated since 2008 remains very strong and has brought national delinquency rates back down to pre-crisis levels. However, we think that the trend of first-time buyers taking out Federal Housing Administration-insured loans, which allow for lower credit standards and lower down payments, could add material risk to the market if it continues.

Source: FitchRatings