According to a report by Fitch Ratings, a global leader in credit ratings and research, Canadian home prices are overvalued “relative to historical macroeconomic fundamental drivers”, with some exceeding nearly 20% of their worth.
Despite the best of efforts of the government to curb growth, home prices rose 7.1% in May (on a year-over-year basis) according to the Canadian Real Estate Association. Fitch Ratings credits this growth largely to historically low interest rates, and a lack of supply, coupled with an increase in demand for homes in major metropolitan areas such as Vancouver.
“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,” says Vanessa Purwin, Senior Director of U.S. Structured Finance.
“We believe high household debt relative to disposable income has made the market more susceptible to market stresses like unemployment or interest rate increases.”
Fitch currently projects unemployment to remain in the 7% range going forward, but with interest rates bound to rise from an all-time low, the market could become increasingly pressured.
The Canadian government has taken several proactive steps in recent years to mitigate some of the risks to the housing market, including tightening loan guidelines while also limiting securitization of insured mortgages to Canadian Mortgage and Housing Corporation administered programs.
But as it always seems to be, the long term future for housing in Canada remains unclear, meaning policy makers may need to take additional steps in the short term.
Featured Image: Growing Home Sales via Shutterstock