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Victoria housing market remains overvalued: CMHC

Greater Victoria’s housing market is now “moderately overvalued,” an improvement from its status as being “highly overvalued,” according to the Canadian Mortgage and Housing Corp.
Victoria's skyline.

Greater Victoria’s housing market is now “moderately overvalued,” an improvement from its status as being “highly overvalued,” according to the Canadian Mortgage and Housing Corp.

The capital region and Toronto are the two areas among 15 in Canada to see their previous overvaluation rating decreased to moderate from high.

Even so, the degree of overall vulnerability remains high in Vancouver, Victoria, Toronto and Hamilton, the federal agency said Thursday in its quarterly housing market assessment report.

Although those areas remain overvalued, it is easing, which is why Victoria is now holding a moderate rating.

That is because house prices are “moving closer to levels supported by housing market fundamentals such as population, personal disposable income, and interest rates,” CMHC said.

The federal body releases quarterly reports examining how many vulnerable markets are within the country. If an area is vulnerable, that means it is imbalanced, which occur through overbuilding, overvaluation, overheating, and price acceleration.

“We are seeing overvaluation pressures unwinding in Toronto and Victoria, despite the fact that Canada’s overall vulnerability remains high,” said Bob Dugan, CMHC’s chief economist.

Braden Batch, a senior analyst for CMHC, said the change in rating took place in the third quarter of last year.

“The population of young adults, which is a key driver of household formation, increased in the third quarter adding support for house price growth,” he said.

“However, the support from population growth was mitigated by a slight decline in disposable income and an increase in mortgage rates.”

Housing sales have been slowing in Greater Victoria from more than a year ago, he said in an interview.

However, “What you don’t hear often is that sales are still at about their 10-year average,” said Batch.

And while price growth has slowed, it is still rising.

Meanwhile, the degree of overall vulnerability remains high in Hamilton, Ont., and also in Vancouver, where the housing market has cooled in recent quarters but property prices remain high compared to these economic fundamentals.

Still, the agency noted that the country’s overall vulnerability rating could be downgraded in future quarters due to signs that overheating and overbuilding remain low in some markets.

“In Toronto, we’ve seen an easing of the pressures of overvaluation because house price growth has moderated and so the level of prices isn’t increasing as quickly but fundamentals are still growing at a strong rate so there has been a narrowing of that gap between actual house prices and fundamentals,” CMHC chief economist Bob Dugan said in a conference call with reporters.

Dugan noted that the agency doesn’t “target” any level of overvaluation in its report.

“Overvaluation doesn’t really have anything to do with affordability,” he said. “In Toronto, you can have prices in line with fundamentals but that doesn’t meant that affordability isn’t a challenge. What it means is that there is a relationship between these fundamentals and prices that can explain the level of prices.”

Last month, the Canadian Real Estate Association reported that national home sales were down 19 per cent in December year over year, capping off the weakest annual sales ever reported since 2012.

The mortgage stress test, which is mandated by the Office of the Superintendent of Financial Institutions, came into effect in 2018 and has resulted in the cooling of some housing markets — particularly in Toronto and Vancouver — by limiting the ability of those with a more than 20 per cent down payment to qualify for mortgages.

The stricter rules requires borrowers to prove that they can service their uninsured mortgage at a qualifying rate of the greater of the contractual mortgage rate plus two percentage points or the five-year benchmark rate published by the Bank of Canada. The policy also reduced the maximum amount buyers would be able to borrow to buy a home.

— With files from The Canadian Press