Photo: James Bombales

For an eighth consecutive quarter, Canada’s housing market remains highly vulnerable to instability thanks to moderate levels of price acceleration and overvaluation.

In the first quarter of 2018, four of the country’s real estate hot spots — Toronto, Vancouver, Victoria and Hamilton — were primarily responsible for keeping the national housing market in “vulnerable” territory, according to the Canada Mortgage and Housing Corporation’s (CMHC) latest Housing Market Assessment, published Thursday.

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[I]t’s mostly a reflection of conditions in the Toronto area and the Vancouver area,” CMHC’s Chief Economist Bob Dugan tells Livabl.

“That’s what’s really driving the national result, those two areas where we’re seeing overvaluation and price acceleration,” he adds.

Released on a quarterly basis, CMHC’s report provides an in-depth outlook of vulnerabilities to housing market instability both on the national level and for 15 Census Metropolitan Areas. A market’s degree of vulnerability (low, moderate, or high) is assessed using four factors: overheating, price acceleration, overvaluation and overbuilding.

Out of the four highly vulnerable housing markets, high evidence of overvaluation was observed in Vancouver, Victoria and Toronto. During Q1 2018, house prices in these markets were not supported by fundamental drivers, such as income, mortgage rates and population, according to CMHC.

“It’s improving, but it’s still overvaluation. And so the message is still that prices are high relative to fundamentals and it’s just something we have to keep an eye on in those markets,” says Dugan.

In Vancouver, rising mortgage rates combined with price growth at the lower end of the resale market continue to support strong signs of overvaluation.

Meanwhile, overvaluation persists in Toronto as strong demand for condos continues to drive price growth for this property type.

“[C]ondo apartments in Vancouver and Toronto have had much stronger price growth in the last little while than single-detached family homes. Prior to about a year-and-a-half ago was the opposite, it was more the single-family home market that was driving growth in prices,” says Dugan.

Overvaluation is not as much of a concern elsewhere in Canada, but evidence of overbuilding has been detected in Calgary, Edmonton, Saskatoon and Regina.

These four centres scored a moderate degree of vulnerability as the inventory of completed and unsold housing units, and the vacancy rate for rental apartments, were above overbuilding thresholds.

Dugan attributes overbuilding in these cities to the 2014 recession that significantly reduced housing demand.

“When the economy really slowed all of a sudden because of the oil price drop it took time for those units to complete, but once they completed there wasn’t enough demand to absorb those units,” says Dugan.

In the first quarter of 2018, Montreal recorded a low degree of vulnerability but rapid price growth in certain neighbourhoods poses a concern for possible price acceleration in the future.

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