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Toronto & Vancouver, No Longer the Only Overvalued Housing Markets in Canada

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Toronto & Vancouver, No Longer the Only Overvalued Housing Markets in Canada
4 min. read
Canadian homes

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Housing in Vancouver and Toronto continued being overvalued in the second quarter of 2020. However, several other Canadian cities also experienced rising property prices due to fewer homes reaching the market during the pandemic.

In its newly released second-quarter housing market assessment report, the Canada Mortgage and Housing Corporation (CMHC) noted:

“There was sharp pullback in new listings and resulting low levels of inventory. This maintained some pressure on house prices in local housing markets that were seeing strong activity prior to the crisis.”

Cities Facing Overvaluation

In Q2, the Vancouver and Toronto housing markets continued to experience higher levels of overvaluations. CMHC Chief Economist Bob Dugan noted:

“Vancouver and Toronto entered the second quarter of 2020 with a general unwinding of housing market imbalances. However, both experienced an increase in observed house prices for some price measures in the second quarter despite the COVID-19 driven decline in economic and demographic fundamentals. This has led to an increase in average overvaluation estimates in both markets.”

Based on the report, Moncton and Halifax also saw rising home prices, albeit to a lesser extent, as did Ottawa and Montreal. What’s more, Dugan believes the level of overvaluation across the country may be higher than reported, due to the temporary increase in disposable income from federal income supplements being offset by unemployment levels.

Ottawa, Montreal, Moncton and Halifax started 2020’s second quarter with housing market imbalances. House prices in all four markets had been increasing before COVID-19 and continued to grow during the pandemic. CMHC noted moderate overvaluation in Moncton and Halifax, and some price acceleration in Ottawa and Montreal. According to the CMHC:

“The Ottawa, Moncton, and Halifax housing markets are all now assessed at an overall moderate degree of vulnerability.”

As for Edmonton and Calgary real estate, prices fell in Q2 due to oil price challenges that affected the two cities. However, the decline was less than expected, considering both markets experienced overbuilding during the past several years.

Earlier this year, the CMHC’s first-quarter assessment showed continued overheating and price acceleration in Vancouver, Hamilton and Toronto, and in the resale markets of Moncton and Montreal. The agency noted overbuilding in Regina, Edmonton and Calgary, while vulnerability (or imbalances in the housing market) were said to be low in Winnipeg, Ottawa and the Maritimes.

For its quarterly assessments, the CMHC looks at price growth, overheating (when sales significantly outpace new listings), overvaluation and overbuilding (amount of unsold housing way above normal levels). Factors such as interest rates, personal disposable income and population are also taken into account.

Market Challenges

Dugan stands by the CMHC’s previous forecast of an 18% decline in average house prices since they had seen a nearly 12% dip in April, and the pandemic could pose longer-term risks. As he noted, several factors are currently weighing on the market, including an increase in deferred mortgages, high household debt, people delaying homebuying decisions due to the pandemic and temporary increased disposable income from federal pandemic-related programs:

“I’m not convinced we have sustainable basis for housing demand with the economic disturbance that’s going on related to COVID-19 and that’s why I stand by the forecast. If I’m wrong on the timing of the trough, that could happen, but I certainly believe in the overall trend that there’s some scope for price decline, for weaker demand, and after that sort of resolves itself, eventually a recovery once we have a vaccine in place.”

By considering all factors that could impact housing, the CMHC rated the Canadian market overall as moderately vulnerable in Q2 of 2020 (just as it did in the first quarter), despite federal wage supplements in place and lower interest rates.

Although Statistics Canada recently reported a 1.4% month-over-month increase in employment this August, there still was a 5.7% decrease relative to pre-pandemic levels in February. Millions of workers have been affected by COVID-19, leading to significantly lower incomes, which will likely affect home purchasing decisions in the long-run.

With economic uncertainty, unique income circumstances, decreased supply and increased overvaluation, it’s clear the pandemic has impacted Canada’s housing market. If the country’s economy can stabilize and Canadians can feel more comfortable moving forward with home selling and home purchasing, perhaps the housing market will recover sooner rather than later.

Source: Financial Post

 

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