Ontario’s housing market is overvalued by about 25 per cent, a dangerous level that threatens not only home price growth in the province, but the overall Canadian economy, says a new report from New York-based Fitch ratings agency.
Overbuilding is being blamed, notably condo growth in the Greater Toronto Area, where construction is at a record high.
“Beneath the unprecedented boom in the Ontario housing market is a large overhang of pending supply that could threaten continued home price growth in the province,” states the report by Fitch Ratings director Stefan Hilts.
It says more than 80,000 condo units are being built in Ontario, which is almost 50 per cent more than four years ago when the boom in multifamily units really started to take off.
That supply spike, combined with flattening condos prices and a construction overhang at time when housing starts in the province have fallen “could present a problem for continued price growth, with the market potentially becoming oversaturated.”
Fitch estimates home prices in the province are overvalued by about 25 per cent, based on a model that considers home prices as well as income, unemployment, and mortgage rates.
It’s the latest prediction, mostly among experts outside of the country looking in, that all or parts of Canada’s housing market are overvalued.
Deutsche Bank has said the Canadian market is overvalued by about 60 per cent, while other forecasts range from about 3 to about 25 per cent. The Economist recently labelled Canada as the most overvalued housing market in the world.
The Canada Mortgage and Housing Corporation (CMHC) said recently that risks of overbuilding and overheated markets vary across the country, and that Regina and Winnipeg had the most to worry about.
It said the Toronto market is at “moderate risk” of overheating, citing the condo building craze.
“Overvaluation in Toronto is due to steady price growth that has not quite been matched by growth in personal disposable income,” the report states. “The level of completed and unabsorbed units and the rental vacancy rate are both below their respective historical averages. However, the level of units under construction relative to population is near historical peaks — inventories need to be managed.”
Fitch says its estimate doesn’t mean it thinks prices in Ontario will fall by 25 per cent, noting mortgage risk is limited, but believes prices could soften with so much condo inventory hitting the market, “which could reverberate throughout the Canadian economy.”
For example, lower prices would slow building activity, which would means less employment in the construction industry.
“This in turn could lead to more significant downside exposure,” the report states.
In a recent report on the GTA housing market, TD Economics said it expects condo prices to sink by about 3-to-4 per cent over the next two years, as a result of overbuilding.
The bank says it’s not expecting a crash in the condo market, “but a cyclical cooling off,” wrote economists Craig Alexander and Diana Petramala
It also notes that markets in Montreal, Quebec City and Ottawa are weakening as a result of overbuilding, but didn’t tank.
“While the Toronto market has remained resilient so far, we do expect the GTA to go through a similar experience,” TD says.