The statement is sure to add more fuel to the fire about what’s next for the next Canadian housing market which has seen a rebound in sales after a slow winter and new records for price set every month.
Fitch points to numbers from Canadian Real Estate Association which show home prices grew 7.1% in May on a year over year basis.
“According to Fitch’s sustainable home price model, which measures home prices relative to long-term fundamentals, Canadian home prices remain approximately 20% overvalued in real terms,” the Chicago-based company said in its statement.
It noted building permits have picked up in recent months along with sales, supported by historically low interest rates and those factors are driving up affordability.
Canadian home prices remain approximately 20% overvalued in real terms
Fitch also said household debt to disposable income, which reached a record high of 164.1% in the third quarter of 2013 before declining the next two quarters, is making the market “more susceptible” to shocks from higher unemployment or interest rate increases.
The federal government has intervened four times to slow the housing market, among the measures being shortening amortization lengths from 40 years to 25 years. It also tightened the rules around eligibility for government-backed mortgage insurance.
Fitch wants more regulation. “The long-term impacts remain unclear, and policy makers may be required to take additional steps over the short term to engineer a soft landing,” the agency said.
But the company’s statement comes as new data suggests the pace of house price gains are slowing on a national basis despite the fact there are still cities that continue to show price growth.
The Teranet Home Price Index increased 4.4% in June from a year ago, down from the 4.6% year over year jump in May.
The composite six index which covers Vancouver, Toronto, Calgary, Montreal, Ottawa and Halifax was up 4.9% in June from a year ago compared to a 5.1% year over year increase in May. Both the overall and the composite index were up 0.9% in June from May.
“With the housing market having now shaken off the winter blues, price are continuing to rise at a solid pace. That said, the continued deceleration in price growth on a year-over-year basis may be an indication that the Canadian housing market is becoming more balanced,” said Toronto-Dominion Bank economist Randall Bartlett.
Canadian consumers appear equally unconcerned about a major correction happening in the market, based on a new survey.
A poll released by Bloomberg and Nanos Research Group shows Canadians have not been this optimistic about the housing market since 2008. The survey found 47% of Canadians predict home prices will rise over the next six months versus 11.6% who said they would drop — the widest gap between the two numbers since 2009.
Long-time housing bear David Madani, an economist with Capital Economics, said those hopes may be unfounded.
He said prices typically move up over the summer season and low interest rates could support further short-term growth in the market.
“The recent declines in existing home sales-to-listings ratios in these markets suggest that further moderation, or outright declines, in the annual rate are likely in the coming months,” said Mr. Madani. “Given the recent drop in mortgage costs, a pick-up in home sales over the next few months might delay this price weakness until next year. But we still believe that the housing market is headed for a major correction over the longer term.”