Toronto at risk of overvaluation despite slowed price growth

The Canada Mortgage and Housing Corporation (CMHC) released its Housing Market Assessment (HMA), announcing Canada’s housing markets as highly vulnerable for the sixth consecutive quarter, mostly due to strong evidence of overvaluation and price acceleration.

The HMA is supposed to serve as an “early warning system,” but the markets have been highly vulnerable for half a year now. There’s been major policy changes in the hottest markets, Toronto and Vancouver, including mortgage stress tests, rent control, and foreign buyer taxes, but the risk status hasn’t changed. What does this say about the way the government is intervening?

“Our market assessment continues to show a high degree of vulnerability for the housing market at the overall national level because of the combination of price acceleration and overvaluation,” says Bob Dugan, Chief Economist. “Regional disparities remained, especially in terms of overvaluation, as some centres in BC and Ontario were still highly overvalued leading to an overall assessment of a high degree of vulnerability.”

To determine the state of Canada’s housing markets, CMHC used data as of September 2017 and market intelligence as of the end of last year.

Toronto, Hamilton, Vancouver, and Victoria continue to be highly vulnerable due to overvaluation and price acceleration. There is low evidence of overbuilding in these areas, but there is cause for concern in Calgary, Edmonton, Saskatoon and Regina.

In Toronto, the average price recorded through the MLS system increased 3.6% in the third quarter of 2017. This was the smallest rate of growth in nearly five years. Despite the slow price growth, pricing is still too high for most buyers.

“While house price growth has slowed, house price levels remained high relative to underlying economic fundamentals such as income and population growth,” explains Dana Senagama, Principal Market Analyst (Toronto). “Therefore, we continue to find strong evidence of overvaluation.”  

The number of completed and unsold units dropped to an all-time low and demand is still strong, so it doesn’t look like overbuilding will be an issue in Toronto any time this year.

According to CMHC, the housing markets in Canada the least vulnerable to overvaluation, price acceleration, overbuilding and overheating are Winnipeg, Ottawa, Montreal, Quebec, 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