Fitch: Ontario housing market 25% overvalued

by Jennifer Paterson06 May 2015
It’s been said before, but it seems the chorus is contagious – yet another report is calling the Ontario housing market overvalued.

The Fitch Ratings report argues the province’s home prices are approximately 25 per cent overvalued, following an analysis between home prices and fundamental economic factors such as income, unemployment and mortgage rates.

It's important to note that despite this proclamation – part of a report released Tuesday – the rating agency does not expect prices to fall, due to a number of positive factors, including limited risk in outstanding mortgage products.

“Nonetheless, elevated price risk poses concerns, especially with a significant amount of inventory poised to hit the market,” stated the report.

“As a large number of units come on line, prices may soften, which could reverberate throughout the Canadian economy.

Lower prices would reduce the incentives to build further units, which could hit employment in the construction sector that has been buoyed by continuing price growth. This in turn could lead to more significant downside exposure.”

Since 2009, home prices in Ontario have grown at an annualized rate of 7.6 per cent, according to the report. It also pointed out that more than 80,000 new multi-family units are under construction in the province – a record high and nearly 50 per cent than four years ago.

“Amid this unprecedented increase in large developments, construction timelines are being extended, with completions lagging behind housing starts,” continued the report.

“With price levels relatively flat over the last six months, the significant boost to supply implied by this construction overhang could present a problem for continued price growth, with the market potentially becoming oversaturated.”

COMMENTS

  • by EddieN 5/6/2015 4:00:37 PM

    Smooshing all types of housing into one pile, taking an average and saying that the market is overvalued is incredibly wrong. Low rise housing in urban areas is getting more and more expensive because there is lack of it, without any new being added. Supply and demand.
    Condo prices have remained flat because it is a different market segment where the supply meets or exceeds the demand. Supply and demand.

  • by Numbers Guy 5/6/2015 5:53:46 PM

    I think it's unfair to criticize the methods of what is a highly sophisticated agency. Fitch has very exhaustive and complicated methods of working out valuations - without these important models they would not have been able to value or rate things like Mortgage Backed Securities in the US - oh, hang on, didn't the collapse of those AAA rated products help contribute to the global market collapse....

  • by DJD 5/6/2015 11:46:19 PM

    I've been in the real estate market for over 40 years. I was working in the GTA real estate market in 1989 when house prices had reached record highs. In the face of concerns by the broader financial community, the real estate brokerage industry vigorously defended the high prices. The message was that prices in the GTA were fine - nothing to worry about. The rhetoric at the time was that Toronto had evolved into a city state that enjoyed a world class status and that the financial community just didn't get that. The residential market then corrected by about 25% by the end of 1989.

    The market lesson was that there's always the temptation to suggest that 'this time is different'. The fact remains that all segments of all global economies experience cycles. Canada is no exception. The broader financial community, including Fitch, are becoming concerned as they were in 1989. They certainly can'y all be wrong. Let's at least be open minded in the face of mounting evidence that things may not be as fine as we would like to believe. We owe that debt of credibility to ourselves and our clients.

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