Canada housing overvalued, but low risk of overheating, says agency

Low risk of overheating or overbuilding, says federal housing agency, with note of caution

PUBLISHED : Wednesday, 06 May, 2015, 1:49am
UPDATED : Wednesday, 06 May, 2015, 1:49am

Canadian house prices are slightly overvalued but there is low risk of overheating or overbuilding, the federal housing agency said, in a report that is at odds with persistent concerns that real estate bubbles are growing in several cities.

In its quarterly measure of four risk factors that could indicate problematic conditions in Canada's housing markets, the Canada Mortgage and Housing Corp said the national market is perhaps 3 to 4 per cent overvalued, below the 8 per cent overvaluation threshold it considers problematic.

Despite the modest overvaluation, the CMHC said there was no concern about overheating, where demand significantly outpaces supply, an acceleration in the growth rate of house prices, or in overbuilding, where supply significantly outpaces demand.

It also said Vancouver showed no signs of problematic housing conditions, despite its high home prices, while Toronto and Montreal were at moderate risk of overvaluation because home price appreciation has outpaced income gains.

It added a "note of caution" for Toronto and Montreal on condominium overbuilding, noting that units under construction are near historical peaks.

"Inventory management is necessary to make sure that these condominium units under construction do not remain unsold upon completion," the CMHC said in the report.

CMHC chief economist Bob Dugan said that while the agency had a high degree of confidence in its models, the data used to gauge home prices is backward looking and volatile.

"There is the possibility you could have risks that are unidentified … and just because a market is green [low risk] doesn't mean you have to be complacent about it," Dugan said.

Data on home prices, home sales and new housing starts has suggested a correction is underway in some Canadian markets, notably in Calgary, Alberta.

But the spring real estate market is roaring ahead in other markets, including Toronto, where prices have risen 59 per cent in six years, and some analysts believe the market is at risk of a US-style housing crash.

Bank of Canada governor Stephen Poloz said last week the central bank has estimated the housing market is overvalued by 10 per cent to 30 per cent, but reiterated the country was not in the midst of a housing bubble.