Fitch: Canadian homes 20% overvalued

Fitch does not, however, expect a collapse and says that if prices were to drop it could take several years to revert to their "sustainable values," depending on factors such as government support and credit availability. In fact, it argues that an observed decline in prices could be limited to as little as 10 per cent.

Of the four major provinces – Alberta, British Columbia, Ontario and Quebec – the agency judged Alberta to be the least overvalued given its continuing climb back from the 2007 correction that cut back historical peaks.

Home prices in B.C., however, have reached highs that aren’t justified by economic fundamentals, Fitch says, pegging Ontario's overvaluation at 21 per cent. Alberta prices are overvalued by 15 per cent, it wagers, with both B.C., and Quebec at 26 per cent.

A key concern for the agency is household debt, which has increased more than 50 per cent since 2000 and was at a high of around 160 per cent of disposable household income in the third quarter of 2012.

While the agency offers a relatively rosy forecast for Canada, expecting falling unemployment and moderate growth, it says Canadian consumers are more vulnerable to external economic shocks such as a sustained increase in unemployment or sharp rise in interest rates.

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