Thanks to slower price growth and less overvaluation activity, the vulnerability of Canada’s housing market has fallen to “moderate” levels for the first time in 2.5 years, according to the Canada Mortgage and Housing Corporation (CMHC).
Home prices across the country fell by 5.4% in the fourth quarter of 2018 compared to the same period in 2017. This development, in combination with the young potential homebuyer population growing by 1.9%, helped lower overvaluation levels — e.g., when home prices are less affordable given average disposable income levels, population, interest rates and other factors.
While the city’s hottest markets — Vancouver, Toronto, Victoria and Hamilton — are still highly vulnerable according to CMHC, home prices in all four cities are easing, and Vancouver in particular saw evidence of overvaluation fall from high to moderate levels.
The CMHC looks at four factors to measure vulnerability: overheating, which refers to sales greatly outpacing new listings; price acceleration, where home prices are trending upwards; overvaluation; and overbuilding, which indicates that the number of rental vacancy rates and unsold housing units is higher than usual.
In addition to slowing price acceleration and overvaluation, overheating and overbuilding has eased across the country as well. Only Moncton and Montreal are exceptions, with both cities showing evidence of overheating due to a narrowing gap between supply and demand in their resale markets.
Still, CMHC said that both cities showed a “low degree of vulnerability” when all four vulnerability factors are taken into account.
Of the four cities that the CMHC said still showed a “high degree of vulnerability,” Vancouver, Victoria and Hamilton were at risk for all four vulnerability indicators.
But Toronto fared better, demonstrating only signs of overheating, price acceleration and overvaluation.
“While inflation-adjusted disposable income declined by 2.7%, the young-adult population increased by 3.6%,” the report said of the city. “The latter effect dominated, which helped to ease overvaluation conditions by supporting growth in price levels consistent with housing market fundamentals.”