CMHC keeps red flag hoisted on housing as ‘strong evidence’ of problems remains
Slow growth in young adult population, dip in disposable income among factors
Canada Mortgage and Housing Corp. continues to give the national housing market its worst possible rating, saying there still is “strong overall evidence of problematic conditions” — an assessment first made three quarters ago.
This time the Crown corporation says slow growth in the young adult population coupled with a decrease in disposable income along with home price growth picking up led to the continuing negative assessment.
“For Canada as a whole we continue to detect moderate evidence of overvaluation and price acceleration so as a result the evidence for overall problematic conditions in Canada remains strong,” said Bob Dugan, chief economist with CMHC, in a conference call with journalists Wednesday. “The strong overall evidence of problematic conditions reflects imbalances we have observed in Toronto, Vancouver and the communities that surround them.”
CMHC’s valuation is part of its quarterly Housing Market Assessment, something the Crown corporation calls an early warning system, alerting Canadians to areas of concern developing in our housing markets so that they may take action in a way that promotes market stability.
In terms of the 15 individual markets studied, CMHC said it saw strong evidence of overall problematic conditions in Victoria, Vancouver, Saskatoon, Hamilton and Toronto — the same five markets singled out a quarter ago.
CMHC defines problematic conditions as imbalances in the housing market that occur when overbuilding, overvaluation, overheating and price acceleration, or combinations of those issues exceed historical norms.
“Toronto and Hamilton continue to show strong evidence of overall problematic conditions due to price acceleration, overvaluation and overheating as price pressures result from demand outpacing supply in the rental, resale and new home markets,” the Crown Corp. said in its report.
The existing homes market in the Greater Toronto Area has seen a slowdown in sales and prices over the last 60 days, a change that coincides with provincial efforts to cool the market including a 15 per cent non-resident speculation tax and expanded rent control rules.
CMHC’s current assessment was based on information until the end of March and therefore does not reflect the changes brought in by the Ontario government. Dugan expects Toronto to follow a similar trend that was seen in Vancouver after the provincial government in British Columbia made moves to rein in housing, including a 15 per cent additional property transfer tax on foreigners.
“In Vancouver, we saw the policies did have an impact in reducing foreign buyers,” said Dugan, noting the share of foreign buyers went from about 10 per cent to four per cent currently. “However, Vancouver is supply constrained and the local economy is very strong, demand for housing has continued and pushed prices back close to where they were prior to the announcement of those policies.”
Dana Senagama, principal market analyst for CMHC in Toronto, said economic fundamentals like income and population growth cannot fully explain the rapid growth in house prices in the city. “We can look back similar at the introduction of the land transfer tax in Toronto which was introduced in 2007 and implemented in 2008. We had a similar response, sales came down, prices started to moderate and that remained in place for nine to 10 months,” she said, noting the previous slowdown coincided with a financial crisis.
CMHC said it factored in the possibility of rising interest rates into its forecast, which was realized this month when the Bank of Canada raised its overnight lending rate 0.25 per cent, leading most financial institutions to raise prime lending rates from 2.7 per cent to 2.95 per cent.
“We had anticipated increasing Bank of Canada of rates and increasing mortgage rates,” said Dugan, noting CMHC has factoring in a 75-basis-point increase in the overnight lending rate in 2017.