(Bloomberg) -- Canada’s housing agency said the country is now at high risk of a sharp correction in home valuations as the continued appreciation in prices becomes unmoored from economic fundamentals.
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The Canada Mortgage and Housing Corp. raised its market risk assessment to high from moderate on Tuesday, in a report showing both activity and prices remain near record levels reached earlier this year amid rock-bottom mortgage rates and a frenzy for bigger living spaces driven by the Covid-19 pandemic.
Though Canada has seen a rising vaccination rate and an improving economy since then, the strength in the housing market is still far beyond what’s warranted by these developments, with prices further detached from labor incomes, the agency said.
“We’re seeing price acceleration, over-valuation, and it’s increasing the vulnerabilities for Canada,” Bob Dugan, CMHC’s chief economist, said on a conference call with reporters. “Hopefully we don’t see a large fall in house prices.”
On top of the shift in the national outlook, the agency raised its risk assessment of Montreal’s housing market to high from moderate, bringing the number of Canada’s major cities deemed most at risk to six. Vancouver was a notable exception, seeing its risk assessment fall to low from moderate on an increase of homes on the market that’s caused price growth to settle down.
At the national level, CMHC noted moderate evidence of home price over-valuation, housing supply at critically low levels, and said price appreciation was starting to accelerate. In another sign of how high demand is relative to supply, the agency saw 85% of newly built homes sold upon completion -- the highest ratio since the early 2000s.
Though the CMHC report was limited to the first half of the year, the benchmark home price continued to climb in August, reaching C$736,600 ($580,260), data from the Canadian Real Estate Association showed earlier this month. That’s a 21% increase from a year earlier, with the cost of homes in Toronto and Vancouver now over C$1 million.
“Housing market activity is very strong, price growth is still very strong, and price levels are still very high, so it’s appropriate to signal the vulnerability,” Dugan said. “Hopefully people can take this information into account before it gets too out of balance, and while it’s still possible to get a more orderly adjustment in these imbalances.”
(Updates with new-build sales data in 6th paragraph. An earlier version of this story corrected the release date in 2nd.)
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