Overvaluation eases but market ‘vulnerable’
Toronto lower, Vancouver high in CMHC report
The country’s overall real estate market remains “vulnerable” despite an easing in overvaluation in cities like Toronto and Victoria in the third quarter, according to a report by Canada Mortgage and Housing Corp.
The federal agency said Thursday this is the tenth quarter in a row it has given the national housing market a “vulnerable” assessment.
The findings in the quarterly report are based on a number of factors including the level of imbalances in the housing market related to overbuilding, overvaluation, overheating and price acceleration when compared with historical averages.
CMHC said it changed Toronto and Victoria’s overvaluation ratings from high to moderate when it measured it against factors such as population growth, personal disposable income and interest rates.
Meanwhile, vulnerability remains high in Hamilton and also in Vancouver, where the housing market has cooled but property prices remain high compared to economic fundamentals.
Still, the agency noted the country’s overall vulnerability rating could be downgraded in future quarters due to signs overheating and overbuilding remain low in some markets.
“In Toronto, we’ve seen an easing of the pressures of overvaluation because house price growth has moderated and so the level of prices isn’t increasing as quickly but fundamentals are still growing at a strong rate so there has been a narrowing of that gap between actual house prices and fundamentals,” CMHC chief economist Bob Dugan said.
“Overvaluation doesn’t really have anything to do with affordability,” he said. “In Toronto, you can have prices in line with fundamentals but that doesn’t meant that affordability isn’t a challenge. What it means is that there is a relationship between these fundamentals and prices that can explain the level of prices.”
Last month, the Canadian Real Estate Association reported national home sales were down 19 per cent in December year-over-year.
Dugan said the impact of the mortgage stress test brought into effect in 2018 is clear, but it cannot be blamed to be the sole contributor to the slowing in some markets.
“We’ve seen a moderation in activity in many centres across Canada since the stress test has been imposed. But there are other things going on as well with respect to fundamentals,” he said.
Kevin Lee, CEO of the Canadian Homebuilders’ Association, said adjusting the mortgage stress test was one of the group’s proposals to the federal government.
“The economic times have changed but the stress test, the way it was put in place, wasn’t built to change no matter what the economic conditions ...,” he said. “We do think it’s time to revisit it.”
“There have been so many changes at the federal and the provincial level over the past few years. We really felt like the changes were coming one on top of one another very quickly and the impact of them wasn’t getting a chance to play out before the next change came,” he said. “Our concern was just the compounding effect of all the ... changes, one on top of another. That’s unfortunately where we are right now.”