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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