Despite waning prices, housing market remains vulnerable

Real estate prices may be dropping, but the overall market is still exposed to a high degree of vulnerability. The Canadian Mortgage and Housing Corporation (CMHC) recently revealed this insight in their latest Housing Market Assessment (HMA) report for Q4.

The findings indicate that tighter mortgage rules, rising interest rates, and weaker growth in inflation have reduced the demand for housing across Canada and consequently eased prices. However, a combination of overvaluation and price acceleration has kept the housing market vulnerable. “Overheating is detected when sales greatly outpace new listings in the market for existing homes,” the report said. “Price acceleration is signalled when the growth rate of house prices increases rapidly.”

The assessment points to markets in Toronto, Vancouver, Victoria and Hamilton as particularly vulnerable. There is also evidence of overbuilding, where inventory of newly built and unsold housing units are higher than normal, in Edmonton, Calgary, Saskatoon, and Regina.

Markets of low vulnerability include Ottawa, Québec City, Moncton, Halifax and St. John’s. Montreal is also observed to have low vulnerability, but a tightening between supply and demand has put significant upward pressure on prices in that market.

Of special note is moderately-vulnerable Winnipeg, where an inventory of new, unsold houses has accumulated over the past two quarters.

The HMA framework was developed to detect vulnerabilities in the housing market, in order to better respond to events such as the Toronto housing bubble of the 1980s and 1990s. The HMA identifies locations in the housing market that are exposed to instability from prices, and uses several indicators to assess market conditions.

“The ability of the HMA to detect vulnerabilities relies on the assumption that historical relationships between prices and fundamental drivers of housing markets have not changed,” said the report.

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