Canada’s housing market ‘vulnerable’ even as overvaluation eases in Toronto: CMHC

Canada’s housing market ‘vulnerable’ even as overvaluation eases in Toronto: CMHC

Canada’s housing market ‘vulnerable’ even as overvaluation eases in Toronto: CMHC

The degree of overall vulnerability remains high in cities such as Vancouver and Hamilton, where the housing market has cooled in recent quarters but property prices remain high compared to these economic fundamentals.

Additionally, the report found that there is moderate overall vulnerability in Edmonton, Calgary, Saskatoon, Regina and Winnipeg, where there is moderate to high overbuilding.

In Calgary, the housing market is still slow with more people turning to rentals instead.

"Given that there's a high level of inventory in the apartment condo market, builders have started to slow down production", said James Cuddy, a CMHC senior analyst.

"As a result, the evidence of overvaluation has changed from high to moderate in Toronto and Victoria".

And while price growth has slowed, it is still rising. Overvaluation occurs when house prices are elevated compared to personal disposable income, population, interest rates and other factors.

The CMHC report indicates Calgary continues to deal with a supply and demand imbalance in the housing market, as an elevated unemployment rate, lower disposable incomes, and higher interest rates have put higher pressure on demand.

Last month, the Canadian Real Estate Association reported that national home sales were down 19 per cent in December year over year, capping off the weakest annual sales ever reported since 2012. "It just means that there is a relationship between economic fundamentals and home prices that can explain the level of those prices". Both markets remained at a "high degree of vulnerability" overall. While inventory levels in the condo/apartment market remain elevated, the rental vacancy rate in Calgary fell from 6.3 per cent in 2017 to 3.9 per cent in 2018. "The second indicator of overbuilding - newly completed and unabsorbed units per capita - continued to remain above the critical threshold, therefore yielding moderate evidence of overbuilding". On a year-over-year basis, sales decreased slightly in the third quarter, keeping the SNLR low and reinforcing buyers' market conditions.

"We've seen mortgage rates inch up this year". The mortgage stress test - introduced at the beginning of 2018 - was meant to ensure homebuyers can still afford their mortgages even if interest rates rise substantially, but many in the real estate industry say it is making it harder for Canadians to buy homes. "So some of the demand in the housing market is actually being shifted away from home ownership and toward the rental market".

Eric Bond, manager, market analysis at CMHC, said in the report, "Home price levels [remain] high relative to local incomes and economic fundamentals, leading to CMHC's continued detection of overvaluation in the Metro Vancouver housing market".

"The annual objective built rental vacancy rate decreased from 7.0 per cent to 5.3 per cent in October 2018, moving the indicator below the critical threshold of overbuilding". The relatively stronger demand for goal built rentals and rental condominium units has helped move Edmonton's rental market towards more balanced conditions.

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