Fitch says Ontario Housing is Overvalued by 21%

Just as BMO returned its 2.99% fixed mortgage, Flaherty resumed his debt warning campaign. One may wonder whether Jim will tighten the mortgage rules yet again. At the same time another alarm about Canadian housing bubble comes from a global rating agency Fitch. 

From Calgary Herald:

American-based agency Fitch says house prices are overvalued by approximately 20 per cent in real terms across Canada, with regional variations.

“Because of the effects of inflation and price momentum, it is not expected that prices would drop by this amount,” said the Fitch report. “If growth halted and prices began to drop, it would be expected to take several years for home prices to revert to their sustainable values, depending on a number of factors such as government support and credit availability. With this time frame, the actual observed decline in prices could be as low as 10 per cent.”

It said rises in prices have continued with small corrections since 1996, and specifically since 2008 have risen when underlying fundamentals suggest that growth is unsupportable.

It said the Ontario market is overvalued by 21 per cent, Alberta by 15 per cent, British Columbia by 26 per cent and Quebec by 26 per cent.

“Actual nominal declines could range from the low single digits (for Alberta), up to more than 15 per cent (for B.C. and Quebec) over the next several years assuming values start falling immediately and taking into account inflation and other market dynamics,” said Fitch.

“Of the four major provinces, Fitch estimates Alberta to be the least overvalued. This is largely attributable to a correction in prices that has kept values below their 2007 peak. A boom in construction on the back of rising oil prices in the years leading up to the financial crisis left Alberta‘s housing market especially vulnerable to macroeconomic shocks. When crude oil prices fell in 2008 triggering a rise in local unemployment, the excess inventory generated by the increase in new construction compounded the negative effect on home prices.”

Fitch says that Ontario housing is overvalued by 21%, but most of the declines are not going to be in Windsor or Kitchener. Toronto will take the biggest hit. Downtown condos will be hit even more. Expect the media to focus on the nominal price declines in the future while ignoring the real declines adjusted for inflation. 

To summarize, so far this year we have IMF predicting 10% to 15%  overvaluation, BMO predicting a moderate correction, Carney calling for more housing adjustment, TD expecting a 2.5% drop in Toronto housing prices and now Fitch comes along with the gloomiest forecasts of all, a 20% overvaluation in the Canadian real estate.