CMHC Canadian Housing Market April 2017
The following shows evidence of problematic housing market conditions for Canada. Our focus will be on Toronto and Hamilton. For 12 other major metropolitan cities around Canada, see the full report on the CMHC website with more information and analysis
- The indicator for overvaluation at the national level has been downgraded from strong to moderate, though strong overall evidence of problematic conditions remains due to detection of both moderate evidence of price acceleration and overvaluation.
- Toronto and Hamilton continue to show strong evidence of overall problematic conditions due to price acceleration, overvaluation and overheating as price growth has intensified and demand is outpacing supply in the rental, resale and new home markets.
HMA analytical framework looks at: overheating; acceleration of house prices; overvaluation; and overbuilding.
CMHC’s Housing Market Assessment (HMA) provides a comprehensive and integrated view that relies on a combination of signals from a number of indicators to assess housing market conditions in fifteen metropolitan areas across Canada, and for Canada as a whole. The HMA allows a wide range of indicators on housing markets to be captured in a single snapshot. The objective is to identify heightened vulnerability to housing market stability from the level of house prices and from factors that are known to influence future house prices.
Overview of the HMA analytical framework
To obtain an accurate picture of the overall state of the housing market, it is important to consider multiple data points and lines of evidence rather than relying on just one measure or indicator.
Specifically, the HMA framework considers four main factors that may provide an early indication of potentially problematic housing market conditions: (1) overheating, a situation when the demand for existing homes greatly outpaces the supply of existing homes for sale; (2) sustained acceleration in house prices; (3) overvaluation of house prices in comparison to levels that can be supported by housing market fundamentals (listed below); and, (4) overbuilding which occurs when the rental market vacancy rate and/or the inventory of newly built housing units that are unsold is elevated. For each factor, the framework tests for: (1) the presence of problematic conditions; (2) the intensity of problematic conditions; and, (3) the persistence of problematic conditions over time.
Generally, a situation in which CMHC detects few market imbalances with low intensity or lack of persistence is associated with weak evidence of problematic conditions. Conversely, as the intensity, number, and/or persistence of the imbalances increases, the likelihood of a factor becoming problematic increases. While a market in a metropolitan area may be identified as having weak evidence of problematic conditions, imbalances may exist within some segments of that housing market, or the evidence in that market may be approaching thresholds for problematic conditions. The framework therefore does not allow for the complete absence of problematic conditions, but identifies the level of evidence as low.
Housing market fundamentals are influenced by demographic, economic, and financial developments. To reflect these determinants, data on population, personal disposable income, and interest rates are used to characterize market fundamentals. The framework also takes into account developments in both resale and residential construction markets. The framework was developed on the basis of its ability to detect problematic housing market conditions in historical data, such as the house price bubble Toronto experienced in the late 1980s and early 1990s.
The ability of the HMA to detect current problematic conditions relies on the assumption that historical relationships between prices and fundamental drivers of housing markets still hold.
HMA Results for Canada and 15 Census Metropolitan Areas
Canada: Strong evidence of problematic conditions
While the overall assessment of problematic conditions remains strong for Canada, overvaluation has been downgraded to moderate from a previously strong assessment. House price growth at the national level has weakened to around 4% year-over-year, while personal disposable income has grown at a steady pace and growth in young adult population has strengthened at the end of 2016. Careful analysis by geography shows that local differences continue to divide the Canadian housing market into several markets: centres in the East are showing weak evidence of overvaluation, while centres in Southern Ontario and the West are showing moderate to strong evidence of overvaluation. High supply in the rental and new home markets relative to demand persist in the aftermath of the oil-price shock in Alberta and Saskatchewan CMAs, while most other CMAs are showing weak evidence of overbuilding at the end of 2016.
Source: CMHC – Visit http://www.cmhc.ca/ to learn more.