Recently analysts have been indicating that residential home prices in the Canadian real estate market may be overvalued to a significant amount. While this doesn’t necessarily spell doom on the horizon, it is important to know for anyone buying or holding property. What could an overvalued housing market mean for Canadians and investors?

Moody’s finds overvaluation of up to 90% in some Canadian markets

A new report from Moody’s analytics indicates their findings of overvaluation across the country. Their report follows many other institutions such as the Canada Mortgage Housing Corporation (CMHC) and The Economist in drawing attention to overly high home prices in Canada’s housing market. Just what is going on?

The report points to severe overvaluation in numerous housing markets across the country, with a general overvaluation of 22% in metro areas nationwide. Overall, Ontario shows the largest amount of overvaluation with none of the analyzed markets being within the range for what is considered correct valuation. In Toronto, home prices sat almost 40% above trend for Q2 of 2021 while Hamilton was up to 73% overvalued. Provincially, British Columbia was not overvalued, however, Vancouver was 23% overvalued, much closer to the national average than Toronto but still not great. The most overvalued housing market in Canada according to the report is the Niagara region, with home prices at 90% above trend. Overall, overvaluation was worst in Ontario and Quebec and the issue was equally prevalent in major cities as well as smaller cities.

A comparatively smaller number of housing markets in the country are doing well and fell within the plus or minus 10% indicating correctly valued homes. A few housing markets are actually displaying a significant overvaluation in home prices. Calgary, for example, saw prices more than 30.92% below trend with Edmonton not far behind at 29.87% below trend.

Despite the rampant overvaluation, the report goes on to say that following a period of massive upward price growth, things are now “showing signs of returning to earth.” They cite a contraction in sales activity, a drop in housing starts, and a decrease in the price of raw building materials as signs that things are returning to more stable conditions. Moody predicts that price growth will “slow considerably” through 2022 and 2023.

CMHC’s Housing Market Assessment finds moderate risk of overvaluation

The CMHC releases a bi-yearly housing assessment in which they rank Canadian markets on overvaluation among other factors. They have pointed to overvaluation as an issue contributing to market vulnerability in Canada. However, their report takes a lighter view on things, with a majority of the analyzed markets being ranked for low overvaluation. Overall, they rank the Canadian housing market as being at moderate and but persistent levels of overvaluation. The CMHC claims that demographic and economic fundamentals can not fully account for price acceleration in home values.

Why are Canadian real estate prices so high?

It’s definitely no secret that prices are high in the Canadian housing market and have been for many years. But the past two years have each seen double-digit growth in home prices, spurred on by conditions surrounding the COVID-19 pandemic such as low-interest rates and a mass amount of Canadians looking to relocate. According to the most recent report from the Canadian Real Estate Association, the average home price rose to $686,650 in September 2021.

Despite what many see as unreasonable prices, the demand for new homes is simply so high that there are still plenty willing to pay for what they can get. Most areas of Canada have major housing supply issues and the ongoing seller’s market has continued to push prices up. For now, it seems the average sale price for Canadian homes will continue to rise into the next few years, though market conditions are beginning to cool off and stabilize. The same CREA report explains that though the market is stabilizing near its current levels, the “demand/supply conditions are stabilizing in a place that very few people are happy about.”

Is Canada seeing a bubble in house prices?

The biggest fear for Canadians invested in real estate is the looming threat of a housing crash or a bubble. It seems the longer a trend continues in real estate, the more people start to warn of an inevitable reversal. In Canada, people have been calling for a housing bubble for almost a decade now as prices rose, and still, it has yet to pop.

However, perhaps recent global events have forced people to confront the possibility of unprecedented changes becoming reality. Either that or some are hoping for a price downturn to ease their entry into the market.

For now, there is no apparent imminent threat of a sudden and massive downturn. If prices continue up, there will be some easing of demand as more Canadians are priced out. In addition, a likely interest rate increase has been predicted for 2022 that will further affect how much Canadians are able to afford. Currently, analysts are predicting the most likely scenario is a continued, albeit much more gradual, increase in home prices. There is also the possibility for the stagnation of prices or a small price correction, but nothing to the extent that could be called a bubble.