More Canadian real estate markets are seeing increased levels of vulnerability. Canada Mortgage and Housing Corporation (CMHC) released the September edition of the Housing Market Assessment (HMA). The assessment shows almost half of Canada’s major real estate markets have moderate levels of risk now. Many markets are also benefiting from government pandemic supports. That means they may be worse off than they appear on paper.
CMHC Housing Market Assessment
The CMHC Housing Market Assessment (HMA) is a straight-forward market look, with a color coded summary. The colors are based on a fool-proof stop light-like system. High levels of vulnerability are marked red. Those with moderate levels of are yellow. Those with no obvious signs of vulnerability are marked green.
There are a few details to keep in mind regarding timelines and sub-ratings. The overall assessment includes the past six quarters of data, but the chart only shows two. That’s why sometimes you’ll see all green for sub-ratings, but a moderate overall assessment. A market that is no longer considered overvalued, can still see a correction to prior levels.
Speaking of overvaluation, this indicator is pretty much useless during the pandemic. Since the Q2 data uses disposable income, which surged during the pandemic, it’s higher than usual. This is due to government supports, which unpredictably, boosted that number. Since this is temporary, the agency notes overvaluations are “likely underestimated.”
Almost Half of Canadian Real Estate Markets Are Moderately Vulnerable
Canadian real estate has a moderate level of vulnerability. There are now 7 major markets displaying a moderate level of vulnerability. This is up from 5 during the February report. New markets to join these ranks are Moncton, Halifax, and Ottawa. The only market to see the rating lower back to a “low” degree of vulnerability is Regina.
Toronto Real Estate Vulnerability Is “Moderate”
Toronto real estate is a low level of risk for all indicators, except the overall assessment. That may seem somewhat contrary to the Spring price forecast from the CMHC, showing falling prices. However, the report notes the gap between fundamentals continued to worsen. It just failed to hit the threshold line for overvaluation, due to the rise in disposable income.
Vancouver Real Estate Vulnerability Is “Moderate”
Vancouver real estate shows few signs of vulnerability, but is overall “moderate.” The report notes a widening gap between fundamentals and observed prices. They also mention government supports made the gap smaller than it would have been without them. As these supports fade, the gap between prices and fundamentals should widen further.
Montreal Real Estate Vulnerability Is “Low”
Montreal real estate saw two indicators hit moderate, but overall was still “low.” Price acceleration and overheating both reached moderate levels of vulnerability. Overvaluation approached the threshold due to a larger gap between prices and fundamentals, but didn’t breach it. The report notes this gap would be wider without government supports.
The September HMA is a little wonky, and the insights are hidden. The takeaway is less about the indicators, and more about what prevented deterioration. Like the debt-to-income ratio’s sharp decline, the positive note is somewhat deceptive. Until government supports are removed, it’s not entirely clear where the market sits. However, from today’s notes, it’s likely to get worse before it gets better.
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I live in Toronto and am confused.
How did disposable income spike during Covid? Wouldn’t the $2000.00 Cerb checks be less than most people’s incomes? Was it due to mortgage deferrals? If so, how can that be considered disposable income?
Prices have been skyrocketing due to increased activity over the last couple months. Given the high amount of household debt leading into the pandemic, wouldn’t this contribute to overvaluation?
Finally, can we look forward to some sort of correction over the next couple years?
Please somebody help me to explain what’s happening in our market.
It’s called a bubble. Either it ends with a pop like the USA subprime mortgage crisis or with hyperinflation like Venezuela, Zimbabwe and Weimar Germany. Prices might correct down massively, or the government will make everything more expensive by giving away money like it is going out of style.
CERB was a flat replacement for incomes, regardless of how much the employee made. So part time employees pulling in $1k just had their incomes doubled.
Also if you earned less than $1,000, you were also eligible to collect. That turned $900 part-time incomes into $2,900 incomes.
Once you understand the objective was to get people to spend instead of save, because the economy needs money flowing, it makes a little more sense.
Not happy about how we’re going to pay for this firehose of handouts though.
Peoples incomes are, for many, taxed at source. CERB wasn’t. The increase was more than face value (the equivalent of $2500 before tax?), but carries a significant tax liability that I expect most did not prepare for.
Yup. Disposable income increased in multiple ways – CERB, mortgage deferral, decreased debt to income ratios. People that had incomes above $2,000 per month before the pandemic obviously are at a disadvantage, but many people working part-time/temp/reduced hours had a nice unexpected boost.
People are still reluctant to spend, though. Fears of job losses, another lockdown, decreased job security in general – we are nowhere near pre-pandemic consumer spending levels. Hence why new car sales plummeted vs. used car sales have sky rocketed.
The same will eventually happen with housing – the government can only pump so much money into mortgage bonds to up liquidity. Once the hysteria and FOMO settles down, people will realize a house is just a house. Maybe it isn’t worth digging into mom and dad’s retirement fund for a small loan of $100,000.
Things are happening and it’s all confusing, but what goes up most come down.
A few points:
1. Many Canadians only worked part time, or are claiming the CERB when they shouldn’t be. Those two factors alone would probably be enough to show up as an average net gain in disposable income. Mortgage deferrals would also boost disposable income because you can remove mortgage payments from the monthly expenses for 6 months. The economic numbers are fully juiced at this point and fully useless for gauging the underlying health of the Canadian economy.
2. Prices were already grossly overvalued in most metros as it is. The mortgage deferrals and CERB is just making people get further into debt.
3. Can we look forward to some sort of correction over the next couple years? – The intellectually honest answer is “probably”. Under its own weight the market would almost definitely collapse, however never underestimate a government’s willingness to support an asset mania, until they’re forced to stop.
According to this, Vancouver is NOT overvalued!!
The second-most expensive city in the world after Hong Kong, on a price to income basis, but don’t worry it is not overvalued!
I don’t really know what to say anymore.
SH
“According to this, Vancouver is NOT overvalued!!”
It is absolutely insane.
A city with household median income is 70K and a knock down crack house is 1.4 Million.
I guess it will take just a bit more time to see that the emperor has no clothes.
It’s similar here in Toronto (and in some cases worst). Median income in Toronto is under the 70k you mention (city of Toronto not GTA as if you take the whole of the GTA this average climbs a little) yet ‘traditional’ home averages are in the over 1 million mark. Makes no sense. based on the yearly average income levels homes should be no more than 350k average based on historical fundamentals but I guess this is what happens when you have the greed of the government running everything and allowing manipulation by industry. No more protecting those who elected you in.
The government is taking money from tax payers and giving it to real estate speculators. Normally that is considered stealing, but since the victims (young and houseless) dont even know what is going on, its simply a crime unnoticed.
I liken it to giving someone drugs to knock them out than replace their money with counterfeit bills.
I dont know why young people are not protesting. Its a crime when the government props up real estate prices, basically just lowering standard of living for generations to come. This is a horrible crime against our nation.
You are completely right but young generation is so blind. Canada is no longer a good country to live.
to Kolf
–I dont know why young people are not protesting.–
1. They already brainwashed en masse, especially after colledge/uni.
2. They young and waiting for HUGE CHANGES – up to “free housing”, “free health care”, “top paid jobs”, “our Gov will take care of us” etc. etc.
I saw that all – I was young and born in Soviet Union.
I think you are right, a lot of younger people (say under 40) don’t realize what has been happening, however, I think part of it is also they don’t know what they can do to change anything or feel like it is completely futile. Voting only gets you so far as every party seems to be just a different variety of wrong approaches and favoring the people with power and wealth.
It is insane how out of control this market has been allowed to get. There needs to be action taken to balance the systemic issues for both the wealthy/industry/economy and the rest of society, not just favoring capitalism. It is such a defeating feeling and a lot of people in metro van I know who weren’t already property owners or lost their ability to continue to own property due to life circumstances-e.g. divorce happening at the worst affordability time- are getting more and more angry and disillusioned. So many went to post secondary, got a good job/career, are doing all they can to save for DP, reduce/eliminate debt etc. basically doing all the things that are supposed to allow someone to reach the station in life that gives you opportunities like homeownership and not counting every penny, living paycheck to paycheck because of how unaffordable the lower mainland has become. Feeling robbed of the promise taking these actions is supposed to provide because of how messed up a number of things have become in our society, not just the crazy gap between local incomes and home prices/rentals, our increasing wealth gap, inequalities in pay for people of colour, women etc. and an economy that favors the rich and not everyday people to the detriment to a fair society. It seems more and more that the people in the middle (make too much for gov support programs like childcare, gst rebates, housing, etc. but not enough to get ahead and stop living paycheck to paycheck- or accruing debt to afford to just live) those that work hard for a living and are not in the top 1-5% of incomes are the ones who have been hung out to dry. No wonder so many people find it better to sit on social assistance and not work than work their butt off to try to better their circumstances. I was born and raised in the lower mainland, my kids have been here their entire lives, we shouldn’t have to be forced to leave our home, our family and friends, school, work, community, basically everything and everyone we are connected to (like so many other people I know) because we are pushed out due to increasing unaffordability. I am lucky and grateful, I have worked since I was 15, I make more than the average wage, I have a professional job that I went to school for, I extremely budget and manage my money, live in the most affordable place that I can find (which is still not even big enough for my family or close enough to their schools) and I still don’t bring home enough money to cover all mine and my kids expenses on a monthly basis, never mind extra’s… it is ridiculous, IMHO there is something majorly wrong with this picture, I honestly have no idea how other people manage, but then again the fact that we are the most indebted in the world likely points to how other people make ends meet… they don’t! they just borrow and hope it gets better in the future. I have little faith that the government wont do everything in their power to keep RE prices high and will continue to enact polices that prevent affordability from ever returning.
CERB (and how some people made way more on it than before it) is the only reason I can think of to why there is more disposable income reported, as I agree money not spent on mortgage due to, mortgage deferrals should not be counted as increased disposable income, and even with people working from home and saving on gas etc., heating/cooling/electricity bills went up with more usage and food became more expensive so I can’t see how it would increase so much from that aspect. Most other forms of reduced spending were discretionary spending not fixed expenses. I am terrified to see how we are going to pay for all this in the future, I fear my kids will be worse off than we are…
Q; How long will it takes for average family with $83000 income if they save %10 of their income each year to save a $200,000 deposit for %20 down and 40000 land transfer fee to purchase a house in Toronto?