Canadian home markets at ‘high risk,’ CMHC warns
Overvalued real estate markets in Toronto, Winnipeg and Regina are now at “high risk,” according to the latest assessment from Canada’s federal housing agency.
Canada Mortgage and Housing Corp., which advises the government on housing policy, refused to wade into the debate over whether proposed policy changes by the Conservatives might stoke markets like Toronto, but others suggest they have the potential to do just that.
“They seem to be just throwing fuel on the fire,” said David Madani, Canada economist for Capital Economics.
In the past two weeks, Prime Minister Stephen Harper has offered two new policies aimed at garnering support among homeowners. On Wednesday, he said a re-elected Conservative government would allow first-time buyers to draw $35,000, up from the current $25,000, from their registered retirement savings plan accounts without any penalty. His party has also proposed a permanent 15 per cent tax credit for renovations from $1,500 to $5,000.
“My concern is you are extending these policies at a time when you know there is considerable overvaluation in the housing market,” said Madani. “Clearly markets in Vancouver and Toronto don’t need any more housing stimulus.”
The Conservative proposals come as the housing market hit record levels on a national basis. The Teranet-National Bank House Price Index rose for the seventh-consecutive month in July but records are now only being set in Toronto, Vancouver and Hamilton, according to new data out Wednesday.
On Thursday, CMHC changed its assessment of the Toronto market, upping its overall risk category from “moderate” in April to the current “high risk.”
“What has changed is we are identifying house-price growth acceleration (as a risk),” said Bob Dugan, chief economist with the Crown corporation, adding that comes on top of prices already being overvalued.
“The high level of risk in Winnipeg reflects risks of overvaluation and overbuilding, while in Regina it reflects price acceleration, overvaluation and overbuilding, particularly of condominium apartments,” CMHC said in its report.
In Toronto, where detached homes are selling for on average about $1-million, CMHC says the price appreciation is a reflection of a larger share of pricier homes hitting the market. Those price gains have not been matched by growth in personal income, giving rise to a modest risk of overvaluation, said the agency.
In the country’s most-expensive housing market, CMHC said there is a low risk of any sort of correction. “(In) the Vancouver market, basically there is lack of risk factors. We are not seeing any evidence of overheating, of price acceleration, overvaluation or overbuilding.”
While much of the focus on the Vancouver market has been on the price of an average detached home, which is more than $1.4 million in the region, Dugan says that is only part of the equation.
“There is tendency to equate high prices levels with overvaluation. High prices are only part of the story,” says Dugan, noting that in the first quarter of 2015 the top 20 per cent of houses in Vancouver sold for an average of $2.2 million, while the other 80 per cent had an average price of $550,000.
A growing concern among many in Vancouver has been the influence of foreign buyers on the market, something Harper addressed during his Wednesday announcement. He vowed to get more data on foreign investment and even consider some kind of intervention, but CMHC said its only current survey is on the condo market.
While the changes proposed by Harper might help some Canadians enter the housing market, many financial planners suggest increasing the incentive to have Canadians raid their RRSPs to buy a home isn’t ideal.
“You are basically taking taxsheltered money out of the system,” said Ted Rechtshaffen, president of TriDelta, and a certified financial planner, adding some people can only afford a home by borrowing from their RRSPs. “If you are able to get a down payment otherwise, I recommend that.”