Strong risk of overvaluation in Toronto and Hamilton

The Canada Mortgage and Housing Corporation (CMHC) released its quarterly Housing Market Assessment (HMA), announcing that overall, Canada’s housing markets are showing “strong evidence of problematic conditions.”

The overall problematic conditions are due to slow growth in the young adult population, a decrease in disposable income, and an increase in home price growth. The HMA is meant to be an “early warning system,” using data and analysis to provide a clear overview of Canadian housing markets.

“We’ve maintained Canada’s overall rating at strong evidence of problematic conditions as we continue to see moderate overvaluation and price acceleration,” says Bob Dugan, Chief Economist, CMHC. “In the first quarter of this year, Canada saw a positive, yet slow growth in the young adult population and a drop in disposable income in all regions except British Columbia. This gives less support to house prices, which picked up again in early 2017 after a period of decline in the back half of 2016.”

The housing markets at strong risk are Victoria, Vancouver, Saskatoon, Hamilton, and Toronto. It kind of seems like Saskatoon doesn’t belong on this list. Saskatoon is at strong risk of overbuilding, but only moderate risk of overvaluation. Everything else is fine.

When you look at Victoria, Vancouver, Hamilton, and Toronto, they all have the same problematic conditions; strong risk of overvaluation and moderate risk of overheating and price acceleration. In Vancouver, the overheating is due to the strong demand for townhomes and condo units. They're starting to see more bidding wars and higher prices again.

Hamilton

“Townhomes and apartments, which typically sell for less than single-detached homes, were in high demand for first-time buyers and families,” says Eric Bond, Principal Market Analyst (Vancouver), CMHC. “This led to multiple-offer situations, increasing prices and moderate evidence of overheating for Vancouver. The market continues to see moderate price acceleration and overvaluation due to low supply, despite record level construction.”

In all four at risk markets, the only thing they’re not at risk of is overbuilding, which in itself is an issue. The lack of supply to meet the strong demand is causing higher prices, pushing even condo units out of reach for some buyers.

“We continue to see strong evidence of problematic conditions in Toronto’s housing market,” says Dana Senagama, Principal Market Analyst (Toronto), CMHC. “Economic fundamentals like income and population growth cannot fully explain the rapid growth in house prices in Toronto.”

The only parts of Canada that are in good shape according to CMHC are Ottawa, Montreal, and the east coast (Moncton, Halifax, and St. John’s).

CMHC definitions of problematic conditions:

Overheating: Sales outpacing listings

Overbuilding: When vacancy rate or unsold inventory increases

Price Acceleration: Partially reflective of speculative activity

Overvaluation: Prices not supported by fundamental drivers, including income, mortgage rates, and population.