Canada’s real estate market is as much as 20 per cent overpriced, an American ratings agency says, while cautioning that the federal government may need to take more measures to slow down borrowing on homes.
But the head of the Calgary Real Estate Board insists the city’s market is undervalued, if anything, and fully capable of supporting current record-high housing prices.
Fitch Ratings is the second U.S. financial agency to sound the alarm on Canadian home prices in the past week, with the Morningstar research firm predicting a 30 per cent correction is possible over the next few years.
The Fitch warning comes as the Teranet-National Bank composite house price index for June showed prices rose 0.9 per cent from May and were up 4.4 per cent from last year.
The year-to-year gain was the lowest in six months, but still more than twice the underlying level of inflation in Canada and above income growth.
Prices were 8.1 per cent higher in Calgary compared with a year ago, while Hamilton saw increases of 7.3 per cent and Toronto and Vancouver climbed 6.1 per cent.
Several major markets showed a cooling trend. Prices in Ottawa-Gatineau fell 1.7 per cent compared with a year ago, Quebec City dropped 2.4 per cent and Halifax lost 2.5 per cent.
CREB president Bill Kirk said Calgary is on course in 2014 to demolish record prices it set in 2007-08 in most sectors of the market.
“Canada-wide, among major cities, we are undervalued by comparison to the Vancouvers and Montreals and cities like that,” he said. “We’re a head office town and we have much more affordability than those other cities.”
Kirk said Calgary’s house prices match its higher average salaries, adding that the influx of new Calgarians, estimated at 26,000 this year, ensure that demand for homes in Calgary will remain strong.
CREB recently reported an average Calgary home price of $492,000 in June, up 5.5 per cent from June 2013。
A week ago, TD Economics issued a report that said Calgary remains the most affordable major market in Canada outside of cities in the Atlantic region.
The bank said its housing affordability index, which measures mortgage payments on an average priced home as a percentage of average household income, puts Calgary at 17.3 per cent, 10 percentage points below its 2008 peak.
Whether Canada’s home prices are due for a big fall has been a hotly debated topic in Canada, but as yet predictions of a housing bubble about to burst have not materialized.
The majority of analysts, including the Bank of Canada, forecast a soft landing for housing, however, with price increases, sales and starts levelling off or decreasing only moderately. Still analysts such as David Madani of Capital Economics warn the longer the correction is delayed, the steeper the fall will likely be.
Fitch Ratings argues that government efforts to moderate growth by tightening mortgage rules and lending practices have had mixed results, noting that sales and building permits for residential construction have picked up in recent months.
Meanwhile, home prices continue to defy gravity mostly because interest rates are so low.
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