Canada's Condominium Magazine

When home prices rise faster than incomes, the result is overvaluation, and Toronto has it

Toronto’s housing market has turned solid red. Last August, when Canada Mortgage and Housing Corporation released its colour-coded assessment of the major real estate markets in Canada, Toronto showed a mix of green, yellow and red, for weak, moderate and strong risk factors. So did most other cities. In CMHC’s latest assessment, Toronto shows red in both the overvaluation and the overall assessment columns.

What it means is that the troublesome four Os—overheating of demand, over-fast price growth, overvaluation, and overbuilding—are persisting in the Toronto market, as they are in many of  the other markets looked at. In Toronto, however, a couple of these factors have intensified to the point that the overall assessment of risk factors is now “strong.” It does not mean that a major correction is imminent, but that there is potential for “getting into trouble,” based on what has been observed under similar conditions in the past. In a word, it’s a warning.

Overvaluation is considered the most serious of these factors and gets the most attention. CMHC defines overvaluation as the state in which house prices are “higher than levels consistent with personal disposable income, population growth, and other factors.” Interestingly, this Housing Market Assessment does not use the word “risk” as in previous reports, substituting instead the less threatening “problematic conditions.”
Source: CMHC

In Toronto, price growth has not been matched by economic growth and demographic fundamentals, hence we have strong evidence of overvaluation. It isn’t that the economy isn’t growing; it just isn’t growing as fast as prices. Prices in Toronto were up 9.4 per cent compared to one year ago. Few people’s incomes grew at that rate. As obvious as it seems, the problem of overvaluation could be resolved, said CMHC economist Bob Dugan, by moderation in prices and/or improving economic conditions.

The most prevalent issue detected in 11 of the 15 centres covered by the HMA is overvaluation. The evidence of overvaluation has increased since the previous assessment in Toronto, Vancouver, Montréal, Edmonton, and Saskatoon as price levels are not fully supported by economic and demographic factors. Problematic overvaluation conditions in local housing markets could be resolved by moderation in house prices and/or improving economic conditions.

Price acceleration has continued in Toronto in 2015, mostly due to high sales in the single detached homes category, exacerbated by low inventories of both new and existing homes. These sellers’ market conditions could be moderated by building more houses, something the local building industry says it can’t do because of a lack of serviced land. In Vancouver, on the other hand, a city famous for having the highest home prices in Canada, the overall assessment of problematic conditions is nevertheless weak, in part because they are building more homes to satisfy demand. CMHC says overvaluation in the Vancouver market is only moderate.

On that other big O, overbuilding, CMHC says Toronto’s inventory of completed and unsold units has remained stable but high, above the historical average, mostly due to condominiums. The good news is that the number of new condos under construction has declined as completions have risen, while low vacancy rates in the rental market suggest that unsold inventory could be “steadily absorbed” provided that builders manage inventories well, says CMHC.

As for what to do with this information, Dugan says the housing reports are meant to promote market stability, presumably by influencing central bank and government policy. Given that evidence of problematic conditions at the national level is determined to be weak, with only moderate overvaluation nationally, policy changes don’t seem likely at this time.

The four factors for assessing housing market conditions

  • Overheating of demand in the housing market, wherein demand significantly outpaces supply.
  • Acceleration in the growth rate of house prices, which could be partially reflective of speculative activity.
  • Overvaluation in the level of house prices, which indicates that house price levels are not fully supported by fundamental drivers such as income, mortgage rates and population.
  • Overbuilding of the housing market, which suggests that supply significantly outpaces demand.


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