Overvaluation still a big problem for Toronto’s housing market, says CMHC
By Lucas on Apr 28, 2016
The Canada Mortgage and Housing Corporation (CMHC) released its latest Housing Market Assessment (HMA), announcing that overvaluation and overbuilding is still prevalent in Canada’s major housing markets.
Toronto CMA’s housing market is showing problematic conditions due to a strong risk of overvaluation and a moderate risk of price acceleration. These two factors are enough for CMHC to deem Toronto’s housing market as strongly problematic overall, though overbuilding is not an issue at all. Overvaluation means that the pricing levels are not reflective of drivers such as income, mortgage rates, and population. Price acceleration is partially due to speculative activity.
“While we see weak evidence of problematic conditions overall nationally, we do detect moderate evidence of overvaluation, meaning house prices remain higher than the level personal disposable income, population growth and other fundamentals would support,” explains Bob Dugan, Chief Economist, CMHC.
Overvaluation was found in nine housing markets and overbuilding in seven. CMHC considers a significant rise or decline from historical averages a sign of problematic conditions. In Toronto, overbuilding hasn’t proven to be an issue, in fact, it is the opposite. The Building Industry and Land Development Association (BILD) announced recently that the new low-rise market in the Greater Toronto Area (GTA) can’t keep up with demand and inventory levels have hit record lows.
Not only is demand outpacing supply in the new home market, the resale market is seeing similar activity. “A tight resale market with demand outpacing supply has led to some of the higher price growth that we are seeing right now, and the growth in house prices has persistently outpaced economic and demographic fundamentals, thus giving rise to strong evidence of overvaluation,” says Dana Senagama, Principal Market Analyst (Toronto), CMHC.
Other housing markets in Canada that are showing strong evidence of problematic conditions include Calgary, Saskatoon, and Regina, all of which are showing moderate to strong risk of overvaluation and overbuilding. Housing markets at moderate risk include Vancouver, Edmonton, Winnipeg, Ottawa, Montreal, and Quebec.
It’s interesting that Vancouver’s overall assessment is only moderate because pundits and media often refer to Vancouver’s market as being in a state that is out of control, problematic, at risk, and even a potential outcome of where Toronto’s market is headed. Though Vancouver probably has the highest housing prices in the country, on average, overvaluation seems to be its only issue.
“We see strong evidence of overvaluation in Vancouver’s housing market. Single detached home prices are higher than levels supported by economic fundamentals and inventories of new and resale homes are declining while demand remains high,” says Robyn Adamache, Principal Market Analyst (Vancouver), CMHC. “We’re also keeping an eye on overheating and price acceleration which are slowly advancing but evidence of these conditions remains weak. Overall, we see moderate evidence of problematic conditions in Vancouver.”
Do you believe that price acceleration is an issue in Toronto’s housing market? Is real estate really overvalued? If supply can’t keep up with demand, doesn’t that raise the value of land and real estate? According to CMHC, Toronto’s housing market has shown strong evidence of problematic conditions since the beginning of 2016. We’re interested in seeing how the rest of the year plays out.
