According to a report by the Canada Mortgage and Housing Corporation (CMHC), part of Canada’s housing bubble might be about to burst. In a country that has a slowing down economy, a real estate crash could trigger an economic collapse. (Source: Canada Mortgage and Housing Corporation, August 13, 2015.)
CMHC’s report aims at detecting problematic conditions in Canada’s housing markets using its House Price Analysis and Assessment framework. This time, it found out that for Toronto, Winnipeg, and Regina, the overall assessment of risk is high.
The source of risk varies from city to city. In Toronto, real estate prices skyrocketed. The city’s high overall risk comes from price acceleration and overvaluation. According to Bob Dugan, Chief Economist at CMHC, the strong price acceleration this year in Toronto is due to a larger share of pricier homes being sold. The problem is, “The rise in house prices have not been matched by growth in personal disposable income, giving rise to a modest risk of overvaluation.”
For the city of Winnipeg, CMHC found that overvaluation and overbuilding contributed to its high level of risk. For Regina, the high risk comes from a combination of price acceleration, overvaluation, and overbuilding.
Overbuilding is becoming a serious problem for Canadian cities. CMHC is currently monitoring overbuilding risk in Toronto, Ottawa, and Montreal. Construction of condominiums is close to historical peaks. Facing this situation, CMHC suggests good inventory management to make sure that “these condominium units under construction do not remain unsold upon completion.”
For the country as a whole, the risk doesn’t seem to be too substantial. “Nationally, CMHC continues to detect a modest risk of overvaluation,” said Bob Dugan, “However, our overall assessment of the risk of problematic conditions varies from centre to centre due to regional differences in housing markets. Imbalances in local housing markets could be resolved with further moderation in house prices or improving economic conditions.”
Note that the overheated housing market in many cities occurred at a time of economic contraction. According to Statistics Canada, the country’s gross domestic product (GDP) has been shrinking for five consecutive months. How long the overheated housing market would last in a recessionary environment remains to be seen.