January 27, 2016 / 5:54 PM / 5 years ago

Canada housing agency sees overbuilding in oil-hit cities

TORONTO (Reuters) - Most of Canada’s housing market is overvalued and overbuilding concerns have increased in the western energy heartland, where a sagging economy has put Calgary at high risk of housing problems, the federal housing agency said on Wednesday.

Construction workers work on building new homes in Calgary, Alberta, May 31, 2010. REUTERS/Todd Korol

In a report highlighting the nation’s uneven real estate market, the Canada Mortgage and Housing Corporation said there is strong evidence of “problematic conditions” in Calgary, Saskatoon, Regina and Toronto, the nation’s largest market.

While the oil capital of Calgary had shown little evidence of housing problems just three months earlier, it shot to the highest level of concern early in the first quarter as vacancy rates soared amid rising unemployment and economic gloom.

“Alberta in general, and Saskatchewan to some extent, is reacting to a fairly significant shock right now, and that is oil prices which even since last October have come down about $20 a barrel,” Bob Dugan, CMHC’s chief economist, told reporters on a conference call.

While high prices are old news in hot markets like Toronto and Vancouver, overbuilding looms as a growing concern in cooler markets as declines in oil and other commodity prices hurt Canada’s economy.

“The evidence of overbuilding has increased since the previous assessment in Calgary, Saskatoon, Regina and Ottawa due to either higher vacancy rates, high inventory of new and unsold units, or a combination of both,” Dugan said in the report, noting Calgary’s vacancy rate had risen to 5.3 percent in December 2015 from 1.4 percent a year earlier.

Canada’s housing market had boomed since 2009, prompting concerns about a bubble in Toronto and Vancouver, but the drop in some markets and a plateau in others has created what policymakers have called a three-speed market.

When four factors - overheating, price acceleration, overvaluation and overbuilding - were considered, Toronto, Calgary, Regina and Saskatoon showed strong evidence of problematic conditions, the report said.

Edmonton was upgraded to join Winnipeg, Ottawa, Montreal and Quebec City as markets showing moderate evidence of problems.

Canada’s overall housing market showed low evidence of overheating, price acceleration and overbuilding, and only moderate evidence of overvaluation, unchanged from three months ago, the report showed.

Economists have been divided over whether the long housing boom would result in a U.S.-style crash in prices or simply a moderation. Analysts said it is difficult to cool some markets without hurting those that are already slowing.

Reporting by Andrea Hopkins; Editing by Will Dunham and Meredith Mazzilli

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