Should Investors Run From Canadian Bank Stocks?

 An important economic data related to financial stability (revealed last week) should be taken into account, before betting on Canadian bank stocks. The housing bubble in Toronto is becoming a major cause of concern for banks and policy makers in Canada.

The Toronto Real Estate Board (TREB) reported that the average property price in the Greater Toronto Area (GTA) reached $916,567 in Mar 2017, a surge of 33.2% year over year. Notably, nationally in February, the average property price of a house (hit an all-time high) witnessed a 2.2% rise from the prior-year period.

The crisis at present is centered on the GTA, but chances of its spilling over to other nearby communities is quite high, with the Canada Mortgage and Housing Corp. also expressing concerns about the same.

In fact, this has already begun spreading. In February, property prices increased 22.6% and 23.5% in Hamilton-Burlington and Kitchener-Waterloo, respectively. This is because people are moving into areas neighboring Toronto looking for cheaper housing.

Wondering what is leading to the spiraling housing prices? Basically it is a combination of several factors such as speculative activity, low interest rates and disparity in the supply and demand for residential properties. Per the TREB, while new listings were up 15.2% in March, it was lower than the rate of sales growth of 17.7%.

Since this news release, shares of a few major Canadian banks on NYSE – The Toronto-Dominion Bank (TD – Free Report), Canadian Imperial Bank of Commerce (CM – Free Report) and Bank of Montreal (BMO – Free Report) – were adversely impacted.

While there is no immediate need for policy makers to intervene and contain soaring housing prices, some of the measures undertaken in Greater Vancouver (one of the most expensive housing market in the country) can be considered in case the matter gets out of control.

A few effective measures including the vacant homes tax and the foreign investment tax have led to a significant fall in housing prices in Vancouver compared with the last year’s level. Also, with an aim to cool down the housing market across the country, the federal government strengthened mortgage availability rules and proposed a plan under which banks will have to take more default risk.

Despite the current situation being a matter of concern for banks as well as policy makers, it is not something that can’t be controlled as we saw in case of Vancouver.

So for investors, Canadian bank stocks are still lucrative. As part of the Zacks categorized Foreign Banks industry, stocks seem to have upside potential as they have a Zacks Industry Rank #52 (top 20%). But investors should keep a close watch on this matter before taking any investment decision.
Of the above mentioned banks, Bank of Montreal sports a Zacks Rank #1 (Strong Buy) while Toronto-Dominion and Canadian Imperial carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.