November 24, 2014 / 4:58 PM / 4 years ago

Canada housing agency sees some overvaluation but few signs of a bubble

TORONTO (Reuters) - Canada’s housing market is modestly overvalued and there is overbuilding in Toronto and Montreal, but there are few signs of overheating, the federal housing agency said on Monday as concerns about a housing bubble persist.

A construction worker swings his hammer at a new home development in Ottawa July 9, 2008. REUTERS/Chris Wattie

The Canada Mortgage and Housing Corp said a new framework to assess the country’s housing market showed conditions were “broadly consistent” with the growth in Canada’s population and economy, including its low interest rate environment.

“At the national level, other than a modest amount of overvaluation, we do not detect the presence of other risk factors such as overheating, price acceleration and overbuilding,” Bob Dugan, CMHC’s chief economist, said in the report.

“There is, however, a cautionary note with respect to overbuilding in Toronto and Montreal. The number of units under construction is elevated in these centers. This could develop into overbuilding if these units are completed but not sold.”

Canada avoided the housing market crash that accompanied the financial crisis in the United States. But a post-recession Canadian housing boom, fueled by record-low borrowing costs, has prompted some analysts to warn a bubble may be in the works.

National prices rose 27.2 percent in the last five years, according to the Teranet National Bank House Price Index. The Bank of Canada is expected to keep its main policy interest rate at 1 percent until late 2015. Five-year fixed mortgage rates have held below 3 percent. [CA/POLL]

CMHC said its new House Price Analysis and Assessment framework is designed to fill gaps in the nation’s housing data. Prominent economists at Canada’s major banks complained earlier in the year that a lack of data makes it difficult to accurately gauge the housing market.

The report focused on the national market as well as eight census metropolitan areas (CMAs): Vancouver, Calgary, Edmonton, Toronto, Ottawa, Montreal, Quebec City and Halifax.

“Risk of overvaluation is most evident in Montreal and Quebec, but the trend is improving. A modest risk of overvaluation is also present in Toronto, Calgary and Halifax. Across the eight CMAs examined, there is no overheating or acceleration,” Dugan said.

Dugan said that to mitigate the risk of overbuilding in Toronto and Montreal, builders need to “hit the appropriate balance” in meeting new demand with units that are under construction but not sold and units that are still in the planning stage.

Editing by Jeffrey Hodgson and Leslie Adler

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