Canada's Condominium Magazine

Low risk, modest overvaluation in housing markets: CMHC

The two Canadian cities with the highest-risk housing markets are—Regina and Winnipeg? Expensive Vancouver’s housing market is low risk? Toronto with its million-dollar average homes, runaway sales and bidding wars is just moderately risky? That’s what the man wrote, the man at Canada Mortgage and Housing Corporation (CMHC). Chief Economist Bob Dugan said in a housing market update that there is just “modest” overvaluation in the country’s markets, some being worse than others. Nationally, the country scores an overall low risk.

How does CMHC measure overvaluation, and what are the risk factors it considers?

There are four risk factors used to determine “problematic” conditions in the markets:

  • Overheating of demand, where demand outpaces supply
  • Acceleration in price growth, possibly indicating speculative activity
  • Overvaluation of prices, also a possible sign of speculation
  • Overbuilding, suggesting that supply outpaces demand

In the case of Regina and Winnipeg, the two cities with the highest risk scores in the country, the combination of risk factors is slightly different, though the “high risk” result is the same. Regina shows price acceleration, overvaluation and overbuilding, especially of condominiums. In Winnipeg, overvaluation and overbuilding are seen.

Vancouver, on the other hand, for all the hysterical press it gets, appears to be the very model of a balanced real estate market. None of the risk factors, says CMHC, are currently detected in Vancouver. Home prices are high, certainly, but demand for housing “across the price spectrum” is supported by growing population and growing disposable income. There are homes available for buyers at different income levels: first-time buyers tend to look to the suburbs, high net-worth buyers and those with equity in their homes can afford to buy pricier homes in the city.

Toronto’s risk level is rated “moderate,” the main risk factor being overvaluation, defined as a disparity between home prices and personal disposable income “and other factors.” The steady growth in Toronto home prices has “not quite been matched” by wage growth. CMHC adds a “note of caution” regarding overbuilding in Toronto. Though both the level of unsold condominium inventory and the rental vacancy rate are below historical averages, the number of condo units currently under construction is “near historical peaks.” This calls for “inventory management” to ensure that all those condos don’t remain unsold upon completion. A bit of a surprise is the assessment that demand for housing has not significantly outpaced supply in Toronto. We are regularly told that the only thing holding home sales back in Toronto is lack of inventory.

Despite the generally low-risk assessment from CMHC, outside observers such as the International Monetary Fund continue to focus on “housing sector vulnerabilities” in Canada. The IMF maintains that housing is 7–20 per cent overvalued, though it does not foresee anything worse than a “soft landing,” given the relatively solid labour market and low interest rates.

Bank of Canada governor Steven Poloz has himself said that housing is overvalued at 10–30 per cent, but speaking before a parliamentary committee in Ottawa this week, Poloz dismissed any notion of a housing bubble. The classic symptoms are not there, he said. There has been no sign of highly speculative activity, no excess. Home construction has been in line with demand. And any overvaluation in the market is the result of fiscal policies, mainly low interest rates, intended to deal with the economic crisis of 2009.

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