Canada

Canadian Real Estate Prices Are Overvalued By Up To 91%: Moody’s

Canadian real estate is very overvalued, according to a massive credit rating agency. Moody’s Analytics released its Canadian real estate model this week. The firm’s model shows markets are overvalued by up to 91% across the country. As disastrous as that sounds, the firm isn’t expecting a big housing crash. The baseline model shows low to no price growth, as mortgage rates rise. 

Higher Mortgage Rates Will Drag Canadian Home Prices

Canadian residential real estate prices are massively overvalued but aren’t expected to fall. The firm’s latest models show urban markets have deviated 22.59% above the trend as of Q2 2021. This is a huge overvaluation, but the firm doesn’t expect home prices to fall at the national level. At least in nominal terms, and with a few regional exceptions. 

Higher mortgage rates are expected to grind growth down to a standstill. Urban prices are forecast to grow 2.62% over the next year (from Q4 2021 to Q3 2022). Another 1.38% growth is forecast to follow in the 12 months after. Not the end of the world, but interest rates are forecast to be higher than price growth in the last year. In the baseline, they are essentially concluding a lot of future growth was just borrowed. Markets will grow into their valuations.

Toronto Real Estate Is 40% Overvalued

Toronto real estate is massively overvalued at these levels, but no crash is forecast. Home prices are 39.5% above the trend as of Q2 2021, almost double the national numbers. Over the next year, prices are forecast to grow just 0.86%, followed by an 0.05% decline in the year after. No, you read that right. It was a strangely precise forecast of virtually no drop in that last year. When do we start the bailouts?

Vancouver Real Estate Is 23% Overvalued

Vancouver real estate is overvalued, but not to the same extent as Toronto. Home prices are 22.95% above the trend as of Q2 2021, nearly half the rate of the country’s largest market. Slow price growth is forecast at 1.17% over the next year, and 1.32% in the following year.

It may surprise some to see Vancouver is less overvalued than Toronto. Especially considering the city is so much more expensive. The conclusion is consistent with findings from the CMHC and IMF. That is, it’s still overvalued — just not as overvalued.

Montreal Real Estate Prices Forecast For A Correction

Montreal real estate is one of the few markets forecast to see a correction in prices. Home prices are 24.96% above the trend as of Q2 2021, but unlike other cities near this level — prices are forecast to fall. Moody’s has forecast a 5.29% decline for home prices over the next year, followed by a 7.21% decline the year after. Considering this is a baseline forecast and not “worst case” forecast, that would be a very big drop.

Canadian Real Estate Price Deviation From Trend

The estimated over (or under) valuation for Canadian home prices, as of Q2 2021.

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

Niagara Real Estate Is The Most Overvalued In Canada

The Big Three real estate markets are far from the most overvalued markets in Canada. That honor goes to Niagara (including St Catherines), which is 90.8% above trend as of Q2 2021. Home prices are still only expected to drop 0.49% over the next year, followed by a drop of 2.9% the year after. Those are relatively small corrections considering the gains made. Small declines imply it can grow into those valuations. Overvaluation too soon can drive future productivity to more affordable regions though.

Peterborough, also in the Greater Toronto region, is the second most overvalued market. Prices deviated 79.65% above the trend as of Q2 2021, after a few years of massive growth. Home prices are forecast to rise 0.52% over the next year, followed by a 2.17% decline the year after. Once again, not much of a correction for the size of market distortion seen at this point.

Saskatoon and Calgary Real Estate Are The Most Undervalued

Saskatoon real estate is the most undervalued market in the country. Prices have deviated 31.78% below the trend as of Q2 2021, and is flying under the radar. Home prices growth is forecast to rise 8.75% over the next year, followed by 9.7% the year after that. Sorry in advance to the people in Saskatoon, if publishing this sends a wave of investors. Or congrats, depending on who you are. 

Calgary real estate is another market that’s bucked the trend on valuation over the past few years. The market is 30.9% below the trend as of Q2 2021, making it the second most undervalued city in Canada. Home prices are forecast to soar 7.6% over the next year, followed by 9.0% the year after. Calgary’s market was hit hard by the oil crash in 2015, but appears to be getting ready to make up for some lost time. 

I know what you’re thinking, what the heck? Prices go up, and they never correct? Aside from the nominal/real home price situations, this is a baseline forecast. This assumes things go as planned, and the government is able to manage expectations.

It’s when expectations go off the rails that home prices move to extremes. If expectations are to the upside, we get a scenario with rapid price growth — like the past year. For a crash to occur, expectations to the downside need to materialize. A scenario like that only happens when very few people expect home prices to fall. This tends to lead to over-leverage, which can make a small dip into a bigger panic.

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36 Comments

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  • George 1 month ago

    What about regions like Lindsey (as per Ron’s interview)? There’s no rationale for them to rise that much, but that’s what’s happening. No correction, they’d rather tax income via elevated inflation?

    Fewer than 20% of the voters screwed the whole country with these clowns.

    • Nassim 1 month ago

      Ron who?

      • Trader Jim 1 month ago

        I think he means Ron Butler. He also says people are just leveraging homes upon homes, and leveraged up to the teats for exposure since the gov is backstopping the market.

        Truly we live in the dumbest timeline.

        • Phil 1 month ago

          Dream on… 90% overvalued?? So my $800,000 house is actually worth $72,000?? Maybe in 1960 but there is no chance this is what the price will ever drop to now… Maybe I don’t understand the calculation but I think they used the most extreme example for their click bait title. Try to buy a house for 40%-90% less than they are now… You actually have to pay a premium over the price around here to even have a chance at buying… “overvalued” or not!

          • Allan Johnston 1 month ago

            That’s not how the math works on this one Phil. Although I am impressed you manage to afford such a lovely home not understanding basic algebra.

            90% over valued means its priced at 190% or almost double of what it should be.

            Try this instead 800000/1.9)= 421,052.63.

  • Kathleen Thomson 1 month ago

    Home prices in Canada could fall a good 91% and still be some of the most expensive real estate in the world. People think high home prices are good for the economy, because it means they’ll have money to spend. They don’t realize low home prices are good for the economy, because it means they can deploy capital and take more risks for long-term sustainability.

    In terms of Canada being a super power, it’s where the US was in 1850. Imagine where the US would be if home prices took a third of their lives to secure shelter, then they could start to invest in industry?

    • Rob 1 month ago

      From 1850 to 1950 houses were – like – $5000. Then they went up. Way up. According to inflation $5000 in 1950 is equivalent to $55,000 today.

      If an average house in 2021 Canada is $610,000, based on 100%, 91% is $555,000 and 9% is $55,000.

      I know figures lie and liars figure but that’s some crazy-ironic math there.

    • John Gench 1 month ago

      You’re confusing the words expensive and affordable. Canadian real estate is some of the cheapest in the world, but affordability is not as it takes into account multiple factors.

      • funcuz 1 month ago

        Um…what? Canadian real estate most certainly isn’t among the cheapest in the world. Doesn’t even crack the bottom ten in the developed world.

      • Rob 1 month ago

        Hi John, I don’t agree. The average price of a house in the US is about $250K, Canada is about $700K. There are 10 times more houses in the states too. Can you explain your statement more?

  • Trader Jim 1 month ago

    I don’t know if prices are going to crash or rise, but the overvaluation is much more important than their conclusion of where prices will go. They have the facts.

    Their expectations need to be balanced for the goodwill of the audience, as well as the clients that pay them to rate their products. During the US housing bubble, they pumped the hell out of how secure home prices are, with no chance of collapsing. Once again, not saying prices are going to fall, but they’re highly motivated to skew to the upside.

  • J 1 month ago

    So why even bother writing this article to fool people into thinking a 91% drop it’s coming when it actually means they are not dropping that means the prices are correct where they are a total complete waste of time reading this article

    • Ethan Wu 1 month ago

      Different articles are written for different people. If they’re saying a soft landing is going to occur and prices just won’t move for years, an investor would look to other areas to get their fix for gains.

      It’s also a credit agency making this claim, which by itself is newsworthy wether you believe them or not.

    • Shane-O-Mac 1 month ago

      Time and time again all these quite intelligent people have these ridiculous moments and leave us with disbelief – and we are to go along with it…
      Gravity is a very strange thing. I tell my kids if I throw a baseball straight up – it will go up (not as far as it used to mind you 😒) and it will come back down the same way. It will not float or glide.
      Same thing applies to each bubble in history and this time is not any different.
      And what I am surprised about is how many are either complacent or fail to realize it – and then spout out stories to keep everything “normal”. But mean reversion will show the true reality shortly. Bet on it. 💰

  • Gabe 1 month ago

    F*ck yeah, Niagara is #1!

    • Average Man 1 month ago

      How can homes both be overvalued and also not be predicted to crash? If they’re not gonna crash or correct, doesn’t that mean the valuation is accurate? I’m not an RE bull. But if they were overvalued they’d fall, but they won’t so they’re not, no? Can someone explain this to me?

    • Canaduh 1 month ago

      Niagara…Falls.

    • Skoon 1 month ago

      Yes boiii!

  • D 1 month ago

    Seems about right, all homes should be priced half off. But I’d really prefer 200% which is fair for all parties.

  • Rob 1 month ago

    ‘ Markets will grow into their valuations.’ That strikes me as a ridiculous statement.

    How does that happen? People still earn Canadian wages, that’s not going to change significantly.

    To follow my previous analogy the average annual wage in 1950 was $3300 supporting a $5000 house. $3300 then is about about $37,500 today but that’s to support a $610,000 house.

    All things being equal wages should be $400,000 to do that.

    I don’t think the gap can ever be bridged. It defies the laws of physics. What force could ever possibly change it?

    • Michael Kousoulis 1 month ago

      That’s the basis of a soft landing. No crash, just a very long period of low to no growth.

      • Rob 1 month ago

        Sorry Michael, that is the basis of fantasy-fiction. Income will not catch up in a decade. Housing is going to be stagnate while incomes go through the roof? Entirely illogical.

  • answer guy 1 month ago

    overvalued with no expected crash means homes are priced appropriately by the market.

    suck and blow…

    • Michael Kousoulis 1 month ago

      No, they’re predicting a soft landing where prices don’t grow for ten or so years and incomes catch up. that’s completely different.

  • Dan 1 month ago

    Eh, they have been waiting for a housing market crash since the 80’s when these so-called experts told me not to buy a home right now because prices were inflated tremendously. And to think if I didn’t do it back then, thank dog I never listened to the experts.

    Same doom and gloom predictions, maybe just maybe, one of these days, one of these people will be correct until then there’s a housing shortage in Canada. Especially in Toronto.

    • Terrance 1 month ago

      I like when people dismiss people that agree with them. Moody’s is literally saying no correction, and you’re like “they’re wrong, they don’t know anything! Prices won’t correct.”

      But for real, if you bought in 1996 your house would have been cheaper than any year in the 80s in real terms. In which case the fictional experts you claim told you not to buy in the 1980s were right, you just didn’t keep track.

      Ron Butler makes a good point in his interview about that. Most people that think the experts are always wrong because they don’t need to follow the price of an asset to the extent of people that work in asset management. Did I lose anything in Vancouver between 2017 and 2021? No, but I also didn’t gain anything. From an asset manager’s perspective, that’s a opportunity cost of 25% lost by not receiving 6% growth in equities.

  • John Campbell 1 month ago

    Doesn’t really say how they determine the correct value of housing in an area. As long as property values are largely determined by supply and demand, real estate in some areas of Canada will be much more expensive than others. This is simply because, other things being equal, some cities, such as Victoria, are more attractive place to live than others, such as Saskatoon.

    • Jaqui 1 month ago

      Credit plays a significant role in setting prices that most supply-ists fail to recognize. No one is saying supply isn’t an issue, but there are more in demand markets than Toronto that are much cheaper, because credit isn’t juiced by the central bank.

      The Bank of Canada outright said they needed to support prices.

  • Chris 1 month ago

    What make Toronto more overvalued than Vancouver. Niagara on Fall is one of nicest place in Canada which comparing with the other places is not so expensive. It looks one of those day trade rating without any fundamentals.

  • Ethan Wu 1 month ago

    The inside joke here is Stephen is always talking about how Moody’s is paid to rate credit by the issuers of products, not the public. This results in them being biased towards market protection instead of the public. An important contributor to the US housing crash, since a crash only happens when no one expects it.

  • jb 4 weeks ago

    kids these days will never be able to afford a home. It is really sad for most of them they work so hard. It is unrealistic the prices that are being paid for dumps. And its all overpaid folks buying them. The average couple working will never own a home.

  • neil 4 weeks ago

    Starting with round numbers, 90% overvalued means a million dollar house in Toronto is only really worth about 525,000. That’s ridiculous. Overvalued, maybe (probably, likely even) – but 90%?? Either it’s straight BS to get a sparkly headline or the data they’re using to calculate valuations isn’t even remotely accurate.

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