January 27, 2016 / 5:48 PM / 2 years ago

Canada housing agency sees overbuilding in oil-hit cities

TORONTO, Jan 27 (Reuters) - Canada’s housing market is overvalued in most major cities and overbuilding concerns have increased in the western energy heartland where a sagging economy has hurt demand, the federal housing agency said on Wednesday.

In a report that highlights the nation’s uneven real estate market, the Canada Mortgage and Housing Corporation said there is strong evidence of overvaluation in Toronto, the nation’s largest market, and Quebec City, while evidence of overvaluation in Vancouver remains moderate.

While high prices are old news in hot markets, overbuilding is looming as a growing concern in cooler markets as declines in commodity prices hurt the nation’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,” said Bob Dugan, CMHC’s chief economist.

Canada’s housing market had boomed since 2009, prompting concerns about a bubble, but has cooled in some markets due to slow economic growth and a drop in oil prices, creating what policymakers have called a three-speed market.

The change in Canada’s economic growth has meant that low interest rates continue to support demand in the two largest markets, Toronto and Vancouver, while rising unemployment and uncertainty in the resource sector sideswipes housing there. Other cities have simply plateaued.

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

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)

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