Hamilton, Moncton becoming highly vulnerable to housing bubble, CMHC says

The jump in home prices seen in many cities this summer and fall was beyond what could be justified by Canadian income levels and population growth, Canada Mortgage and Housing Corp. said in a new report released Wednesday.

The comment was part of the CMHC’s Housing Market Assessment, which concluded that Canada’s residential real estate market is as vulnerable to a housing bubble as it was earlier this year. The report categorized 15 Canadian cities as having low, moderate, or high vulnerability based on whether the local real estate market is seeing overheating, rapidly rising prices, overvaluation or overbuilding.

Hamilton, Ontario

The Canadian housing market is moderately vulnerable overall, but now has more high-risk cities and fewer low-risk cities, CMHC said. Hamilton and Moncton have become highly vulnerable amid price acceleration and overvaluation of homes in the second half of this year.

”Pent-up demand, low interest rates and the comparatively mild impact of COVID-19 restrictions on unemployment supported strong sales activity” in Moncton, the report said, while Hamilton has seen a disproportionate increase in sales from buyers in pricier Toronto neighbourhoods.

”These buyers only add to the number of sales in Hamilton, not the number of listings,” the report said, noting that he strongest sales growth occurred in some of Hamilton’s most expensive neighbourhoods in Burlington, Ancaster and Stoney Creek.

Overvaluation of homes has also increased in Toronto, Montreal and Regina, although CMHC said all three cities are only considered moderately vulnerable to the type of conditions seen in the late 1980s and early 1990s Toronto housing bubble.

The national housing agency forecast earlier this year that house prices could fall by nine per cent to 18 per cent before recovering in 2021.

It didn’t happen. While home prices did plunge in April, they rebounded this summer as home sales volumes hit records in several regions. Local and national real estate boards alike have pointed to pent-up demand from spring’s shut down as a driver of summer’s housing market boom.

Buyers have also developed a preference for more room as they stayed home during lockdown, and put less emphasis on short commutes to city centres, CMHC chief economist Bob Dugan acknowledged. All this demand for housing, with relatively few new listings, pushed prices higher in many regions, local economists said in CMHC’s report.

CMHC is working on a new forecast, Dugan said, which will take the recent real estate strength into account.

”We thought that the third quarter was going to be weaker than it was. Clearly as the economy reopened, there was a very strong rebound in terms of employment and overall economic growth,” Dugan said in a press conference.

”But the housing market mirrored that, which is a bit of a departure from what we’ve been forecasting.”

But Dugan says CMHC continues to expect ”headwinds” coming for home prices, citing ongoing shutdowns from COVID-19, and mentions of potential economic contractions by the Bank of Canada.

”I think there is still downside risk that could result in some softness and weakness in prices going ahead,” he said.

Home sellers at Re/Max, Royal LePage and the Canadian Real Estate Association all say they expect home prices to increase next year, although Fitch Ratings has said it also foresees a dip in Canadian home prices in 2021.

CMHC said the Canada Emergency Response Benefit ”decoupled” income losses from job losses this year, but the government supports were more of a way to keep rent and mortgage payments going _ not fuel house purchases.

”Temporary sources of income, they’re unlikely to have a big influence on decisions by households to purchase a home,” Dugan said.

”And at the same time, they’re unlikely to be used by mortgage lenders as a source of income to grant a new mortgage.”

In a separate report released on Wednesday, CMHC noted that there was a 20 per cent year-over-year jump in the value of mortgage originations between January and October of this year. The report said the pop stemmed from both property purchases and refinances amid lower interest rates, “coupled with significant increases in housing prices in some Canadian markets.”

That report said that close to two out of three borrowers had resumed their previously deferred payments on their mortgages at the end of the third quarter of 2020. But the housing agency warned that ”in the coming months, we could see higher delinquency rates if some borrowers are unable to resume their payments.”

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