Canadian housing overvalued by 21 per cent

The Canadian housing market has been deemed overvalued by 21 per cent by Fitch Ratings; though the organization forecasts only a soft landing as opposed to a harsh fall.

“Though Fitch projects a decline in home prices, there are several factors that could point to a 'soft landing' where nominal prices simply flatten out or experience relatively small reduction,” the report states. “In real terms, however, long-term fundamentals, as evaluated by Fitch's sustainable home price model (SHP), identify the Canadian housing market as being 21% overvalued.”

The decline in prices isn’t expected to exceed 10 per cent over the next five years, however, despite home prices in Canada skyrocketing 130 per cent since 2001 and grossly outpacing income growth.

“Canadian national home prices have rapidly increased over 130% since 2001, outpacing income growth over the same period by over 80 per cent,” the report states. “The story is the same for Canadian regions such as Ontario (overvalued by 21%), Alberta (15% overvalued) and British Columbia and Quebec (both overvalued by 26%).”

The report also warns that a drop in housing prices could have a detrimental effect on the economy as a whole.

“Canadian buyers reaching for homes at high prices are pushing household leverage to record levels, leaving borrowers susceptible to interest rate shocks,” Stefan Hilts, Fitch Ratings director said. “With a high level of employment and individual net worth tied to the value of the housing stock, a housing downturn could have serious consequences for the overall economy in Canada.”

Though Hilts is confident that the measures taken by the Canadian government to reign in the rapidly

“The Canadian government has been very proactive with numerous policies specifically targeting a soft landing, which augurs for nominal home prices simply flattening out or seeing relatively small reductions,” Hilts said.