soft landing canadian housing market Photo: Steve Jurvetson/Flickr

In a special report released today, Fitch Ratings said that Canadian nominal home prices would likely fall by no more than 10 per cent over the next five years in a “down scenario.” (Tweet this)

While the ratings agency projected a decline in prices, it noted that there are several factors that could point to a soft landing for the market, where home prices flatten out or see a comparatively small decline.

The report also said that the Canadian market, as evaluated by Fitch’s sustainable home price model, is 21 per cent overvalued. National home prices have increased over 130 per cent since 2001, greatly outpacing income growth over the same period by more than 80 per cent.

Regional housing markets are also overvalued, according to Fitch, with British Columbia and Quebec both overvalued by 26 per cent, Ontario’s market overvalued by 21 per cent and Alberta’s market overvalued by 15 per cent.

Fitch Director Stefan Hilts sounded the alarm on the Canadian economy’s high level of exposure to rising home prices in a press release accompanying the report.

“Canadian buyers reaching for homes at high prices are pushing household leverage to record levels, leaving borrowers susceptible to interest rate shocks,” he said.

“With a high level of employment and individual net worth tied to the value of the housing stock, a housing downturn could have serious consequences for the overall economy in Canada.”

Hilts went on to single out the Canadian government as being pro-active with policies aimed at dialing back activity in Canada’s housing market, increasing the likelihood of a soft landing, despite the 21 per cent overvaluation in real home prices.

Looking for more housing market analysis? See how Canada’s banks reacted to the latest Canadian Real Estate Association report here and get Standard & Poor’s perspective on Canada’s record household debt level here.

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