“Strong Evidence of Overvaluation” in Metro Vancouver Housing Market: CMHC

Housing agency changes tune on Vancouver real estate prices, while arguing that “weak evidence” of other market risk factors reduces the likelihood of a bubble 

Canada’s federal housing agency has adjusted its outlook on Vancouver’s housing market, citing “strong evidence of overvaluation” and “moderate evidence of problematic conditions,” according to a quarterly report issued April 27.

The Canada Mortgage and Housing Corporation's (CMHC) spring 2016 Housing Market Assessment (HMA) report, which examines activity in the fourth quarter of 2015, said that there is “strong evidence” Vancouver real estate is suffering from overvaluation in its prices.

This isthe first time that CMHC has issued a warning about conditions in Vancouver’s scorching-hot housing market, and is an upgrade in status from the “moderate evidence” of overvaluation cited in the January 2016 report, which looked at Q3 2015 activity.

Every quarter, the CMHC examines real estate in 15 major metropolitan centres and identifies four high-risk indicators:

  • overheating of demand in the housing market (demand significantly outpacing supply);
  • acceleration in the growth rate of house prices;
  • overvaluation in the level of house prices; and,
  • overbuilding of the housing market (supply significantly outpacing demand, which can reflect excess new construction and/or a decline in demand for existing homes).

In its latest report, the CMHC reported that that “the observed level of home prices is higher than the level warranted by underlying economic and demographic fundamentals” – leading to its upgrade in its assessment on the risk of overvaluation.

However, it added that there was still “weak evidence” of any of the other three risk factors being at play in Q4.

Regarding overheating of demand, the report said, “Although the sales-to-new listings ratio has been firmly in sellers’ market territory (sales-to-new listings ratio of 45 to 60 per cent) since late 2013, this indicator remains below the [75 per cent] HMA threshold for overheating.”

On price growth, the report said, “In the fourth quarter of 2015, detached home prices grew at their fastest rate… [but] multi-family home prices have not surpassed previous peak rates of growth.”

The CMHC assessed that the strong evidence of overvaluation, combined with weak evidence in the other three risk factors, balanced out to create “moderate evidence of problematic conditions” in the Vancouver housing market.

Robyn Adamache, CMHC’s market analysis principal for Vancouver, confirmed, “Overall, we detect moderate evidence of problematic conditions in the fourth quarter for the Metro Vancouver housing market, a change from weak evidence in the previous quarter. This change was due to a shift from moderate to strong evidence of home price overvaluation.”

However, as this report assesses 2015’s fourth quarter, and does not take into account the sales and prices rises seen so far in 2016, it is likely that the next quarterly analysis will see another uptick in the CMHC’s assessment risk factors.

The CMHC report added that there was still “a range of housing available to buyers across a wide price spectrum.”

It said, “The top quintile of all homes sold in the fourth quarter averaged $2.15 million. When this group is removed from the data, the aggregate average home price declines by more than $300,000 to $548,000. The upper quintile comprises mostly single-detached homes. High net worth individuals and those who have gained equity in their homes from sustained price growth in the region are engaged in this market, while the majority of other buyers focus on lower priced homes in condominium developments and suburban locations. Low mortgage rates have aided affordability by keeping monthly mortgage payments relatively stable over time in inflation-adjusted terms.”

The report added, “However, the down payment remains a challenge for first-time home buyers and repeat buyers with little equity in their home as continued home price appreciation drives down payment levels higher.”

Having added Vancouver to the list, the federal housing agency highlighted problems in 10 out of the 15 largest local housing markets in the country. However, it said despite concerns in key metropolitan areas, it believed that there is little evidence that the overall national housing market is likely to see a correction.

CMCH repeated its concerns from earlier reports over Toronto, Calgary, Regina and Saskatoon, where it said it found “strong evidence” of problematic conditions. 

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