Canadian Real Estate Markets Are Up To 108% Overvalued: Moody’s

Canadian real estate is significantly overvalued, according to a giant institutional intelligence firm. Moody’s Analytics’ released their Q4 2021 assessment of home price valuation. They found home prices have continued to rise above trend, indicating overvaluation. Cities are now up to 108% overvalued, a problem particularly bad in Southern Ontario.

Canadian Real Estate Is 23% Overvalued

Canadian real estate shows a significant deviation from the trend for prices. Urban prices are 22.9% overvalued as of Q4 2021, only up slightly from the 22.6% in Q2 2021. An overvalued market doesn’t mean a crash is inevitable, per se.

Stagnation of growth for a very long-time is a possibility, called a “soft landing.” Bubble expert Hilliard MacBeth says he can’t find any evidence that’s ever occurred. Anywhere. He suggests a bubble can pause and get bigger, but ultimately that’s just a bigger bubble. It’s possible in theory, it’s just never happened.

Alternatively, housing can continue to divert funds from the productive economy. That usually ends in a big recession or a financial crisis. It’s a gamble policymakers get to make, sometimes known as can kicking.

Provinces In Eastern Canada Are The Most Overvalued

Obviously some provinces are more overvalued, but less obvious is which ones. The most overvalued are Nova Scotia (25.3%), PEI (23.6%), Quebec 17.7%, and Ontario (17.1%). If that slipped by, those markets are overrepresented from the national urban aggregate. Only mild overvaluations are seen in New Brunswick (2.4%) and British Columbia (0.3%). Stop fuming — no one’s saying BC is affordable. It’s just minimally deviating from its trend, and the whole province isn’t Vancouver, which we’ll circle back to in a sec.

Canadian Real Estate Over/Under Valuation

The deviation of real estate prices from the trend. Positive numbers indicate potential overvaluation, while negative indicate under valuation.

Source: Moody’s Analytics, RPS; Better Dwelling.

Real Estate In Western Canada Might Be Significantly Undervalued

There are still undervalued provinces, all located in crude-heavy provinces. Alberta (-22.7%), Saskatchewan (-21.7%), and Newfoundland (-13.9%) were all severely undervalued. Manitoba (-6.9%) has a more modest undervaluation, but that’s still big for a whole province. Now, let’s look at markets by city.

Toronto Real Estate Is Almost Twice As Overvalued As Vancouver

Canada’s largest real estate markets have extremely large overvaluations. Toronto (43.6%) and Montreal (30.3%) are massively above the national trend. Vancouver (22.3%) is just a hair under and likely to be within any margin of error. High-flying Halifax (13.0%) is also overvalued, but below the national average.

Canadian Real Estate Markets Are Up To 108% Overvalued

Now for a look at the most overvalued cities, which are concentrated in Southern Ontario. The top spot goes to Peterborough (107.8%), followed by St. Catharines-Niagara (106.9%), and Windsor (100.5%). A triple digit overvaluation in those cities almost makes Hamilton (78.1%) look tame. The number for Hamilton is actually lower than Canadian Parliament’s estimate.

The concentration in Southern Ontario accompanies a widespread belief of an inventory shortage. Experts are increasingly showing data points that challenge that opinion. Prominent economists are even flat-out declaring it a myth in some cases.

Overvaluation isn’t exclusive to Southern Ontario, though. Moody’s estimates that 77.1% of Canadian markets are currently overvalued.

Canadian Real Estate Over/Under Valuation

The deviation of real estate prices from the trend. Positive numbers indicate potential overvaluation, while negative indicate under valuation.

Source: Moody’s Analytics, RPS; Better Dwelling.

Only 1 In 5 Real Estate Markets Are Undervalued

It’s shocking, but Canadian real estate speculators missed a few cities. Saskatoon (-38.0%), Calgary (-32.0%), and Edmonton (-29.0%) had the most significant undervaluations. About 1 in 5 (22.9%) real estate markets are undervalued. Most are in Western Canada, but Atlantic Canada has a few as well. 

Earlier this month, Moody’s warned higher rates would slow the market. They don’t see a significant correction in the works (yet?) but did warn risks slants to the downside. Other firms, such as Oxford Economics, see substantial corrections. Though circling back to our earlier point, intervention can keep prices inefficient. They warn that would likely result in a Financial Crisis, instead of just a home price correction.

8 Comments

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  • Ron Bruce 5 months ago

    If only we could see this much evaluation in companies that compete on the global stage, we might all be able to afford a home. I don’t see this happening at any time. Canada isn’t the epicentre of invention, innovations or new technologies. Typically, Realtors, Lawyers, Banks and over 30% of the country’s workforce work for the Government (i.e. municipal, provincial, federal) don’t contribute to the Country’s intellectual property or innovation. Sitting on the sidelines watching competing companies pull the tax train isn’t a winning proposition.

    If 50% of residents that live in the cities are RENTERS, who are the parties funding, backing or manipulating all these increases in real estate prices? This is the data that we need to know.

  • Opinion Man 5 months ago

    Peterborough?
    I’ve been there and in my opinion it’s as much of a dump as Oshawa.

  • M W 5 months ago

    Overvalued doesn’t matter when people can and will continue to buy.

    For the inevitable “pAsT pErformaNcE doEs nOt gUaraNTeE fUtuRe RetUrns” comment- the market has been overvalued for years now and there’s not a single good reason this won’t continue to happen. Try to keep up!

    • Kevin Logan 5 months ago

      and interest rates will never rise and more than 2% inflation will never happen in our lifetime. The boomer narrative is well played.

      • M W 5 months ago

        Yes yes, it’s too bad we don’t have historical data to look at when inflation was above 2% and rates had risen to see what happened to the housing market.

        If you’re still having trouble keeping up, the answer is: prices went up. Even when they slowed down, they still went up. Hopefully this will get through to you!

  • Axel McLion 5 months ago

    Have to question these analyses claiming that Western Canada is undervalued.

    • CD 5 months ago

      I have to question their statement that Toronto is 43.6% overvalued – seems too low to me.

      Were they using early 2021 data because prices have definitely gone up another 30%+ since mid-2021.

      I think Toronto is 75-100% overvalued.

  • Dev 5 months ago

    What are they using to benchmark valuation/establish “trend price”?

Comments are closed.