Evidence of overvalued home prices grows in a number of markets: CMHC

There is mounting evidence that house prices in a number of Canadian cities — including Vancouver, Saskatoon and Hamilton — are out of whack with incomes and other economic fundamentals, according to the latest report from the federal housing agency.

Canada Mortgage and Housing Corp. says it has found evidence of overvaluation in nine of the 15 real estate markets included in its quarterly report released Wednesday.

Overbuilding was identified as a problem in seven of the markets tracked by the report.

"Overvaluation and overbuilding remain the most prevalent problematic conditions observed across the 15 centres," Bob Dugan, CMHC's chief economist, said during a conference call.

Overvaluation occurs when home prices are so high that they are not fully supported by economic fundamentals such as family incomes, mortgage rates and population growth, according to CMHC.

The housing agency says overvaluation grew from moderate to strong in Vancouver and Saskatoon between January and April.

In Saskatoon, it was a deterioration in the underlying economic conditions — and not prices — that was responsible for the elevated warning flag, whereas in Vancouver, red-hot prices were to blame.

"Fundamentals are actually quite strong in Vancouver," said Dugan. "There's been a lot of employment and income growth and population growth, but prices are increasing by even more."

In Hamilton, overvaluation increased from weak to moderate over the same three-month period as prices of single-family homes climbed.

"It's one of the hottest markets in Ontario," said Ted Tsiakopoulos, CMHC's regional economist for Ontario, adding that migration from less affordable nearby cities, such as Toronto, has been one of the drivers of Hamilton's price growth.

In all the other markets, overvaluation remained stable compared to the previous quarter.

Edmonton, Calgary, Regina and Montreal all continued to see moderate evidence of overvaluation, while in Toronto and Quebec City, evidence that house prices are overvalued remained strong.

Strong evidence of overbuilding — a measure which suggests that the supply of new homes is outpacing demand for them — was found in Saskatoon and Regina.

Meanwhile, Calgary, Winnipeg, Ottawa, Moncton, N.B., and St. John's, N.L., all demonstrated moderate levels of overbuilding.

In Toronto, overbuilding in the overall market was weak, but CMHC warned about potentially problematic conditions in the condo sector.

"We do have some concerns about the high inventory of completed and unsold condominium apartments," Dugan said.

Despite the fact that 10 of the 15 markets tracked displayed strong or moderate evidence of problematic conditions overall, the agency said that on a national level, signs of trouble are weak.

Dugan says it's not unusual for national statistics to mask the issues that are occurring on more regional levels.

"Often the national picture looks fairly benign," Dugan said.

"It's always when you drill down to more local levels of detail that you can uncover some issues or imbalances that warrant attention. I think that the message from this overall is that the national picture doesn't represent the level of imbalance in individual markets."

CMHC's house price analysis and assessment aims to identify potential risks in Canadian real estate by evaluating economic, financial and demographic factors in 15 housing markets.

The four factors to identify the level of risk in housing markets are: overheating of demand, accelerating price growth, overvaluation of prices and overbuilding.