Although measures have been put into place to curb housing markets across Canada at the end of 2016, there is still strong evidence of problematic conditions overall, according to the latest Housing Market Assessment (HMA) released by Canadian Mortgage and Housing Corporation (CMHC). The largest threat is that of overvaluation, which was the same issue identified in the last HMA that was released in October 2016.
 
This framework looks at four areas of 15 different housing markets, or Census Metropolitan Areas (CMAs): overheating, when the demand for existing homes greatly outpaces the supply of existing homes for sale; acceleration of house prices, which is detected when price growth exceeds normal market changes on a persistent basis; overvaluation, reaching levels that cannot be supported by housing market fundamentals; and overbuilding, when the rental market vacancy rate and/or the inventory of newly built housing units that are unsold is elevated.
 
The four housing markets in danger of overvaluation are Vancouver, Toronto, Hamilton, and Quebec, the same as in October 2016. Saskatoon and Regina raised red flags for overbuilding, same as in 2016. In fact, the only housing market to back away from being strongly problematic to moderately problematic was Calgary, whose previously overvaluated market is now moderate, although its issue with overbuilding remains the same.
 
Another problematic area detected in Canada is that of price acceleration. Home prices showed a seven per cent growth year-over-year across the country, and that’s after adjusting for inflation. This price growth is most pronounced in British Columbia and Ontario. In Toronto, house prices increased by 16 per cent by the third quarter of 2016 compared to that of 2015, prices which have not been matched by growth in personal disposable incomes. Prices rose across all housing types, although it was particularly evident in the luxury single-detached market. Declining inventories of both new and resale single-detached homes contributed to rapid price growth, as did fewer starts and developments featuring new single-detached projects in areas of high demand.
 
The only Central Metropolitan Area (CMA) that presented weak evidence of problematic conditions was Ottawa. Although there is some overbuilding there, the number of completed and unsold units has dropped “significantly” in the past year. In the areas surrounding Toronto -- Hamilton, Oshawa, Barrie, Guelph, and Kitchener -- the growth in home prices was 10 per cent, 21 per cent, 16 per cent, 12 per cent, and 13 per cent respectively. Hamilton is a particular area of concern because the current sales and price trends “point to a tight resale market despite weak employment and slow income growth in Hamilton itself.” In fact, if you removed Ontario from the calculations regarding price growth, then the average house price in Canada would’ve remained flat into the third quarter.
 
Which begs the question, what about Vancouver?
 
“Metro Vancouver continues to be assessed as showing moderate evidence of price acceleration and strong evidence of overvaluation,” the assessment reads. Although home sales have dropped over the last half of 2016, resulting in less evidence of overheating in that market, the supply of resale homes is still strikingly low, which means demand is still high. “Single-detached home prices, in particular, continue to be at levels higher than those consistent with financial, economic and demographic fundamentals. Inventories of new homes remain low, and rental vacancy rates across the region are below one per cent in most areas, indicating weak evidence of overbuilding. Considering all factors, the overall assessment for Vancouver indicates strong evidence of problematic conditions.”
 
Victoria, on the other hand, is now at moderate risk of overvaluation compared to its weak risk in October 2016. Demand is still high, supply is still extremely limited, construction of new units didn’t keep up, and prices continued to rise.
 
In the provinces most affected by oil prices, prices have started to stabilize. There’s moderate evidence of overbuilding in Edmonton, but both there and in Calgary, house prices have moved more in line with economic and demographic fundamentals. Calgary’s employment levels have also started to stabilize, which is good news for the current generation of first-time home buyers, who continue to post modest gains.
 
Moderate evidence of overvaluation was detected in both Saskatoon and Regina. Both locations have suffered from a lack of personal disposable income, so although home prices have trended down, residents haven’t been able to take advantage. Labour and economic conditions there are weak, and there is strong evidence of overbuilding.
 
Not much has changed in Winnipeg, where overbuilding is the biggest concern. Although the level of completed and unsold units is still higher than normal, it has dropped significantly over the past year.
 
Montreal and Quebec both showed moderate evidence of problematic conditions due to overvaluation. There has been an increase in prices due to a recent tightening of market conditions. The overvaluation is thought to be the result of an overall decline in the population pool of first-home buyers aged 25-34 years old, and a modest increase in personal disposable income.
 
Out east, some other factors are at play. In Moncton, for example, Syrian refugees added to Moncton’s population and helped to lower the apartment vacancy rate, which is the first time in four years that the vacancy rate has fallen below the acceptable threshold for overbuilding. The same story is playing out in Halifax. In St. John’s, weaker overall housing market activity is attributed to a lack of economic growth, slower growth in the young-adult population and declines in real personal disposable income, all of which are linked to the year-to-date price pressure.
 
“Home buyers should be prudent and ensure that their purchases are aligned with their needs as well as the long-term market outlook,” said Bob Dugan, CMHC chief economist.

The HMA serves as an early warning system, alerting Canadians to areas of concern developing in our housing markets so that they may take action in a way that promotes market stability.

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