Housing Agency Dials Back Warning of Overvaluation in Toronto

(Bloomberg) -- Homes in Canada’s biggest city are showing fewer signs of being overvalued, taking some pressure off a market that remains highly vulnerable, the federal housing agency said.

Toronto now shows “moderate” overvaluation, down from the riskiest rating of “high” given in October, Canada Mortgage and Housing Corp. said Thursday from Ottawa. Both the national and local housing markets still show a high degree of overall risk, according to the agency’s quarterly assessment.

The report leaves Vancouver as the lone major center still showing several major signs of strain after years of efforts by policy makers to counter a dangerous surge in prices and consumer debt loads. Toronto’s market has improved as economic drivers such as employment and population catch up with price gains, and CMHC analysts said the Pacific coast city’s overvaluation rating could also decline if a similar trend persists there.

“In Toronto, we see sort of an easing of the pressures on overvaluation because house price growth has moderated,” Chief Economist Bob Dugan told reporters on a conference call. “But fundamentals are still growing at the same rate, at a strong rate.”

Dugan also said the impact of a stress test imposed last year on mortgage applicants requiring them to prove they can handle rising interest rates is difficult to “isolate” from other changes in the market. Along with that rule change, the Bank of Canada has raised interest rate five times since mid-2017.

The Toronto Real Estate Board, in a report Wednesday, said home prices will rise 4 percent this year as buyers adjust to the stress test, and CMHC’s assessment said recent price gains have been modest.

Canada’s overall market has been at the “high” risk rating for 10 straight quarters. The housing agency categorizes risks as low, moderate or high across 15 Canadian cities based on signs of overvaluation, sustained price acceleration, overbuilding and “overheating” when demand outpaces new listings.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Stephen Wicary, Chris Fournier

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