Strong risk of problematic housing market conditions found in the GTA
By Lucas on Oct 27, 2016
The Canada Mortgage and Housing Corporation (CMHC) released its quarterly Housing Market Assessment (HMA) and Housing Market Outlook (HMO), announcing that there is strong evidence of problematic conditions for the country’s housing market as a whole and in the Greater Toronto Area (GTA).
“We now see strong evidence of problematic conditions overall nationally,” says Bob Dugan, Chief Economist, CMHC “This is fuelled by overvaluation - meaning house prices remain higher than the level of personal disposable income, population growth and other fundamentals would support. This overvaluation coupled with evidence of overbuilding in some centres means that growth in house prices will slow and housing starts are expected to moderate in 2017 and 2018.”
CMHC found evidence of overvaluation in nine Census Metropolitan Areas (CMA) and overbuilding in seven. Of those seven CMAs at risk of overbuilding, the GTA was not included.
Toronto CMA is however showing strong evidence of overheating, price acceleration, and overvaluation. “We have detected evidence of market overheating for the first time, while evidence of price acceleration and overvaluation persist,” says Dana Senagama, Principal, Market Analysis (GTA), CMHC. “Careful monitoring of the housing market remains warranted.”
Before everyone starts jumping to conclusions, we should remind you that CMHC’s quarterly reports are designed to predict where the market is headed so that the industry and government can take preventative action.
The evidence of overheating in Toronto lies in the sales-to-listings ratio. In the second quarter of 2016, the seasonally adjusted sales-to-listings ratio went up to 75% in the GTA. CMHC’s threshold is 70%, so the GTA housing market is only at a moderate risk of overheating.
Price acceleration has proven to be a major issue in the GTA. The low amount of listings in the new home market and resale market has caused price growth to surge. In the GTA, the year-over-year price growth was up around 15.8%. York Region saw the largest price growth at 20.7% and Toronto had the lowest price growth at 10.6%.
The CMHC finds risk of overvaluation when economic and demographic drivers are not in line with price growth. While the MLS average price went up 6% year-over-year in the GTA, disposable income dropped 0.3%. In order for Toronto CMA to not be at risk of overvaluation, either price growth needs to slow or everyone needs to start making more money quickly.
According to CMHC, it’s more likely that price growth is going to slow throughout 2017 and 2018. You can expect housing starts and MLS sales to slow down too, mostly through 2017 and then stabilizing in 2018. Total housing starts in 2017 are expected to range from 38,000 to 43,000 and from 36,000 to 42,000 in 2018.
The only thing the GTA housing market is not at risk of is overbuilding. The demand for new and resale housing is so strong that the market can barely keep up. In fact, the CMHC states that the new home market will be absorbing activity due to low resale inventory, while the Building Industry and Land Development Association (BILD) is reporting a record low supply of new low-rise homes and a declining number of new high-rise homes.
Do you think CMHC is accurate? Will price growth slow throughout 2017? Can price growth slow down if supply doesn’t meet the strong demand for housing across the GTA?
