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The Canadian housing market continues to surprise and confound real estate watchers. But as prices climb, is it a sign that homes in the country are overvalued?

Central 1 says no, Deutsche Bank says oh yes, and Fitch Ratings echoed the sentiment before changing its mind on how much prices could fall in the future. TD Bank grappled with the question in their quarterly housing report and recently came to the conclusion that home prices are likely overvalued by about 10 per cent.

Currently, the home price-to-rent ratio points to an overvaluation of 60 per cent, but the bank cautioned that this number is skewed by rent controls.

Looking at the home price-to-income ratio, Canadian homes could be overvalued as high as 30 per cent. But the definition of income isn’t broad enough to include other factors such as investment income or government transfers. Including other sources of income, the market is only 8 per cent overvalued.

TD believes the best indicator for gauging the health of the market is affordability, which is very sensitive to other factors, such as interest rates. Using current interest rates, the bank says the market appears to be fairly valued, though a more normal interest rate environment would put overvaluation at 25 per cent

Since interest rates are eventually expected to see a modest increase in the future, TD Bank believes homes are likely overvalued by about 10 per cent. However, markets in Toronto, Vancouver and Ottawa are more vulnerable to overvaluation than the markets of the Prairies and Atlantic Region.

Overall, the bank believes that slowing demand and rising supply will curb the rise of prices and modest increases in interest rates will keep the market in check.

For more details, check out the table below:

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