The overvaluation in the Toronto and Victoria real estate markets have dropped significantly, however, according to the Canada Mortgage and Housing Corporation (CMHC), the vulnerable rating that was previously given to Hamilton and Vancouver remain. The CMHC came out with a statement on Thursday, expressing their concern in regards to the vulnerability, and stated that this was the tenth subsequent vulnerable rating that the last ten quarters have received. The national housing market is and has been under a microscope, and what was unveiled is quite interesting.
When calculating quarterly results, various factors are taken into account. Examples being imbalances in overheating, price acceleration, and of course overvaluation. It’s also important to note that these factors are compared to those with historical value, in order to help predict future housing market trends.
When taking into account factors such as population activity (growth), disposable income (individual), and interest rates, Toronto’s overvaluation rates changed to moderate, after previously being deemed high. This rating was changed by the CMHC.
In Hamilton and Vancouver, the housing markets have both cooled quite significantly, however, the vulnerability rating is still being deemed high. This rating was made simply because the property prices remain higher than to the economic fundamentals. These economic fundamentals are always taken into account, and display an important insight that other factors may not provide.
Fortunately, overheating and overbuilding seem to be fairly low in various markets across the country, and therefore it is predicted that the overall vulnerability rate at which the country currently resides will drop significantly in the near future. The drop is expected to take place in a future quarter, rather than the current.
According to Bog Dugan (CMHC Chief Economist), the gap between the economic fundamentals and the price of housing has become increasingly narrow. According to Dugan, Toronto has seen “an easing of the pressures of overvaluation”. Seems as though the vulnerability rating may not survive for much longer. Could the ten quarter long streak end in the next few quarters? Only time will tell.
It’s important to note that Dugan stated that the CMHC does not specifically target overvaluation, and the statistics released from the federal agency should be analyzed in accordance to that statement.
According to Bog Dugan, affordability is separate from overvaluation in principle. The economic fundamentals are not required to be matching the housing prices in order for affordability to not be an issue. Several factors should be taken into account, rather than just one.
According to the Canadian Real Estate Association, December was home to sales that were down nearly 19% when compared to previous years. Deemed to be the worst annual sales reported in nearly 7 years, 2012 is looking as though it’s making a come back.
In order to cool down housing markets, the federal government enabled the mortgage stress test, which makes it harder for those who are wealthier to obtain mortgages from the big six banks. Those who can pay more than 20% of a loan down payment have been limited in terms of mortgage availability and loan amount. It’s also important to note that the Bank of Canada has introduced various requirements that one will have to accomplish before acquiring a loan from their bank. These new regulations are a product of the mortgage stress test, and are not to be acted upon outside of this test.
The mortgage stress test was inquired upon, as the Toronto Real Estate Board just recently pushed Ottawa towards considering whether or not the mortgage stress test is outdated, and needs refurbishing. Afterall, the mortgage stress test was not necessarily designed for our modern day economy, but rather an outdated one. The board is concerned as to both the harm an outdated test may do, as well as just how beneficial an updated one may be to the Canadian real estate market.
According to Dugan (CMHC Chief Economist), the stress test is not to be blamed as the only factor at fault for the slowing market, but rather, many should be taken into account. “But there are other things going on as well with respect to fundamentals which are contributing to some of the slower demand”, stated Dugan. “We’ve seen mortgage rates inch up this year. There is a combination of factors. It is hard to isolate the impact of the stress test by itself but certainly it attributed to some of the slowing demand we have seen”.
According to the chief executive of the Canadian Homebuilders’ Association, Kevin Lee, the mortgage stress test has been a topic of conversation for a while now. They are pushing to have the test refurbished in order for it to be more useful, and of course more beneficial to the Canadian real estate market. Various meetings have taken place with the Prime Minister’s office (PMO), and future change is in the hopes.
“There have been so many changes at the federal and the provincial level over the past few years. We really felt like the changes were coming one on top of one another very quickly and the impact of them wasn’t getting a chance to play out before the next change came… Our concern was just the compounding effect of all the different changes, one on top of another. That’s unfortunately where we are right now”, stated Kevin Lee of the CHA.