Canada’s housing market entered a high degree of vulnerability in the second quarter, says the Canada Mortgage and Housing Corporation.

Previously facing only a moderate degree of vulnerability, Toronto, Ottawa and Montreal are the country’s most risky markets because of rapid price acceleration and overvaluation. Moreover, there have been persistent imbalances in a few markets in Ontario and Eastern Canada.

“Exceptionally strong demand and home price appreciation through the course of the pandemic may have contributed to increased expectations of continued price growth for homebuyers in several local housing markets across Ontario and Eastern Canada,” Bob Dugan, CMHC’s chief economist, said. “This, in turn, may have caused more buyers to enter the market than was warranted.”

The federal agency noted that historically low-interest rates, financial support provided to Canadians due to the pandemic, more disposable income and elevated employment during the first half of the year strengthened housing market fundamentals. Additionally, mass vaccination programs have also played a role in increasing purchasing power, but CMHC doesn’t believe those are the only reasons for stronger fundamentals.

Canada had historically high home sales in Q1-2021 thanks to demand outpacing available supply, and while transactions slightly moderated in the second quarter, the market remains overheated at the national level, CMHC says, largely because of insufficient inventory.

In the Greater Toronto Area, home sales decelerated in Q2 but there still wasn’t enough supply to meet demand, which resulted in persistent price acceleration.

In Montreal, CMHC says prices have risen higher than existing fundamentals, including labour income, justify. Consequently, there are signs of overheating in the market even though sales softened and inventory rose in Q2.

However, CMHC adjusted Vancouver’s rating from moderate to a low degree of market vulnerability because price growth in the city eased in the second quarter. Additionally, homeowners in Vancouver are listing their homes in droves—certainly in a larger-than-usual quantity—and it is quelling competition between homebuyers.

But there remains a high degree of vulnerability in both Hamilton and Ottawa because of price acceleration and overvaluation in the former and low listings in the latter, despite sales having slowed down since April, which has resultantly put upward pressure on pricing.