house prices overvalued

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The Canadian housing market has seemed unstoppable this spring with reports of price increases both nation-wide and across major markets such as Vancouver, Toronto and Calgary. In light of the May report from the Canadian Real Estate Association (CREA), which recorded sales and price increases, and the news of more home building, Fitch Ratings has aired its concerns about the state of the market.

In a news release, the global rating agency said it believed Canadian home prices are approximately 20 per cent overvalued in real terms. The number is based on Fitch’s sustainable home price model, which measures home prices relative to long-term fundamentals.

The analysis is a bit of a departure from the softer tone it took earlier this year.

The agency stated in the release: “We believe high household debt relative to disposable income has made the market more susceptible to market stresses like unemployment or interest rate increases.” The ratio of debt to income reached a high of 164.1 per cent in third-quarter 2013 before declining slightly in the following two quarters.

While Fitch predicts unemployment will remain at its current 7 per cent range, interest rates are a cause for concern. Since the already low rates are unlikely to fall any further, an increase could put pressure on the market “given high borrower leverage and the short-term structure of Canadian mortgages.”

The agency believes the federal government was being proactive in mitigating the real estate market through acts such as tightening up the underwriting guidelines for loans insured by the Canadian Mortgage and Housing Corporation.

However, they caution that since the long-term effects of these changes are still unknown, the Canadian government may have to step in once again to help bring about a soft landing for the market.

Fears of overvalued house prices and bubble trouble have been around for quite some time. Check out our timeline tracking the trend.

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