CMHC Releases Results of Its House Price Analysis and Assessment Framework for Canada and Major Markets

OTTAWA, November 24, 2014 — Results from Canada Mortgage and Housing Corporation’s (CMHC) House Price Analysis and Assessment (HPAA) framework were released today indicating that overall, housing markets in Canada remain broadly consistent with underlying demographic and economic factors such as employment and interest rates. Nevertheless, a modest amount of overvaluation is observed, meaning that house prices are slightly higher than what the underlying factors would suggest.

“CMHC is committed to expanding the availability of information about Canada’s housing markets. This knowledge will ultimately contribute to a stronger housing finance system,” said Evan Siddall, President and Chief Executive Officer of CMHC. “The HPAA adds to CMHC’s efforts to identify, and where appropriate, fill significant data and information gaps.”

The HPAA is a comprehensive framework that is designed to assess housing market conditions by taking into consideration the economic, financial and demographic drivers of housing markets. The use of multiple indicators of housing conditions, which incorporate various data sources and prices measures, provides a robust picture of overall housing market conditions. The results released today include those for the national market as well as 8 Census Metropolitan Areas (CMAs) — Vancouver, Calgary, Edmonton, Toronto, Ottawa, Montreal, Québec and Halifax.

“At the national level, other than a modest amount of overvaluation, we do not detect the presence of other risk factors such as overheating, price acceleration, and overbuilding,” said Bob Dugan, CMHC’s Chief Economist. “Risk of overvaluation is most evident in Montreal and Quebec, but the trend is improving. A modest risk of overvaluation is also present in Toronto, Calgary and Halifax. Across the 8 CMAs examined, there is no overheating or acceleration.”

“There is however a cautionary note with respect to overbuilding in Toronto and Montreal. The number of units under construction is elevated in these centres. This could develop into overbuilding if these units are completed but not sold. To mitigate this risk, builders will need to hit the appropriate balance in channeling new demand between units that are currently under construction but not sold and units that are in the planning stage,” noted Mr. Dugan.

Additional information and results for the 8 CMAs are available in the attached backgrounder. As well, the full text of this article is available in a special edition of Housing Now — Canada Edition.

This is the first phase of information being released as part of the HPAA Framework. Additional, market-specific analysis will be released as available, with future reporting taking place on a semi-annual basis starting in Q1 and Q3 of 2015. Updates will also be available as part of CMHC’s Housing Market Outlook which will be published in Q2 and Q4 in 2015.

As Canada’s authority on housing, CMHC continually works to increase the amount of available data and analysis on the housing market.

CMHC draws on more than 65 years of experience to help Canadians access a variety of high quality, environmentally sustainable and affordable housing solutions. CMHC also provides reliable, impartial and up-to-date housing market reports, analysis and knowledge to support and assist consumers and the housing industry in making informed decisions.

Follow CMHC on Twitter @CMHC_ca.

For further information contact:

Charles Sauriol
CMHC Media Relations
613-748-2799
csauriol@cmhc-schl.gc.ca

Backgrounder

CMHC’s HPAA framework assesses housing market conditions and considers the incidence, intensity and persistence of four main risk factors that may provide an early indication of the potential for a sharp decline in house prices.

  1. Overheating of demand, wherein housing demand significantly outstrips supply
  2. Acceleration in house prices which could be partially reflective of speculative activity
  3. Overvaluation in house prices which could be partially reflective of speculative activity
  4. Overbuilding of the housing market, which suggests that supply has responded too strongly to demand pressure.

Each of these risk factors is measured using one or more indicators of housing demand, supply and/or price conditions (see table 2). The following section describes each of these risk factors in greater detail.

HPAA Results

Toronto, Calgary and Halifax are assessed at a moderate risk of overvaluation because a relatively limited number of fundamental economic, financial and demographic factors in these centres are at levels below those that we estimate as consistent with observed price growth.

In Toronto, the main cause of a moderate risk of overvaluation is that real personal disposable income has not been increasing as fast as growth in house prices in recent years. However, since early 2014, income has increased and population growth in the 25 to 35 year-old cohort (which is an important source of first-time homebuyers) is trending up, which are two developments that are supportive of housing demand. In addition, house price growth in Toronto has been moderating since late 2013. So far in 2014, Improving employment and demographic conditions, combined with moderation in price growth, is reflected in a moderate risk of overvaluation for this CMA.

Similarly, strong overall population growth in Calgary, including growth of the 25 to 35 year-old cohort, has partly offset the impact of little growth in personal disposable income in recent years. This positive demographic impact supports a moderate risk of overvaluation for Calgary.

Halifax presents a different scenario. Despite essentially flat home price growth, a moderate risk of overvaluation is detected due to a decrease in the borrowing capacity of households as a result of higher inflation-adjusted mortgage rates in late 2013. However, the risk of overvaluation has moderated in 2014 as a result of decreases in mortgage rates combined with stronger growth in the 25 to 35 year-old population.

Montréal and Québec are assessed as having a moderate overall risk. This reflects the fact that a relatively large number of economic, financial and demographic factors in these centres are currently at levels below those that we estimate as consistent with observed price growth.

In both Montréal and Québec, the risk of overvaluation reflects decreasing growth in the 25-to-35 year olds since 2012, as well as the fact that personal disposable income growth has not kept pace with the growth of house prices in these two centres since the early 2000s.

Unlike the situation in Toronto, Calgary and Halifax, these fundamental demographic and economic drivers of housing demand have not yet “turned the corner” in Montréal and Québec, while offsetting positive developments (in particular, declining mortgage rates in early 2014) have not compensated. Consequently, a relatively high risk of overvaluation is assessed in Montréal and Québec.

Table 1: Overall housing market assessment for Canada’s major centres
HPAA Risks Factors Current Overall Assessment Overheating Acceleration in house prices Overvaluation Overbuilding
National Low risk Low Risk — At the national level, modest overvaluation is observed meaning house prices are slightly higher than levels consistent with personal disposable income and population growth. Overheating, acceleration in house prices and overbuilding are not a concern at this time. Low risk / Stable, unchanged Low risk / Stable, unchanged Moderate risk / Decreased Low risk / Stable, unchanged
Vancouver Low risk Low Risk — The level of home prices in Vancouver is supported by local growth in personal disposable income and long-term population growth. Low risk / Stable, unchanged Low risk / Stable, unchanged Low risk / Stable, unchanged Low risk / Stable, unchanged
Calgary Low risk Low Risk — Overvaluation in Calgary reflects the combination of strong growth in house prices and modest gains in personal disposable income. Low risk / Stable, unchanged Low risk / Stable, unchanged Moderate risk / Increased Low risk / Stable, unchanged
Edmonton Low risk Low Risk — While price growth in Edmonton has increased slightly since 2011, price increases remain in line with growth in the population of first-time homebuyers and growth in personal disposable income. Low risk / Stable, unchanged Low risk / Stable, unchanged Low risk / Stable, unchanged Low risk / Stable, unchanged
Toronto Moderate risk Moderate Risk — Overvaluation in Toronto is due to steady price growth that has not quite been matched by growth in personal disposable income. The level of completed and unabsorbed units and the rental vacancy rate are both below their respective historical averages. However, the level of units under construction relative to population is near historical peaks — inventories need to be managed. Low risk / Stable, unchanged Low risk / Stable, unchanged Moderate risk / Decreased Low risk / Increased
Ottawa Low risk Low Risk — House prices in Ottawa are in line with population growth and growth in personal disposable income. Low risk / Stable, unchanged Low risk / Stable, unchanged Low risk / Stable, unchanged Low risk / Stable, unchanged
Montréal Moderate risk Moderate Risk — In Montreal, overvaluation reflects slower growth in the pool of first time home buyers since 2012, impacting demand, combined with house price growth that has generally exceeded growth in personal disposable income since 2004. The level of completed and unabsorbed units is close to its average but the level of units under construction relative to population is near a historical peak — inventories need to be managed. Low risk / Decreased Low risk / Stable, unchanged High risk / Decreased Low risk / Increased
Québec Moderate risk Moderate Risk — In Québec, overvaluation reflects slower growth in the pool of first time home buyers since 2012, impacting demand, combined with house price growth that has generally exceeded growth in personal disposable income since the early 2000s. The supply in the new home market relative to population is elevated but remains within historical norms. Low risk / Stable, unchanged Low risk / Stable, unchanged High risk / Decreased Low risk / Increased
Halifax Low risk Low Risk — In Halifax, despite essentially flat home price growth overvaluation is detected due to a decrease in the borrowing capacity of households due to higher inflation-adjusted mortgage rates in late 2013. The level of completed and unabsorbed units relative to population increased recently but remains below historical peaks. The risk of overvaluation has moderated in 2014 as a result of decreases in mortgage rates combined with stronger growth in the 25 to 35 year-old population. Low risk / Decreased Low risk / Stable, unchanged Moderate risk / Decreased Low risk / Increased
Level of risk Direction of risk from the last assessment
Low risk Stable, unchanged
Moderate risk Increased
High risk Decreased

Note 1: Colour codes indicate the level of risk: The HPAA does not only test for the presence or incidence of signals of potentially problematic conditions, but also considers the intensity of signals (that is, how far the signal is from its historical average) and the persistence of signals over time.

Generally, low intensity and persistence are associated with a lower potential of evolving into a problematic condition. As the number of persistent signals increases, the associated risk of a problematic condition developing increases.

Note 2: Arrows indicate the direction of risk since the last assessment: The HPAA is regularly updated over time, as new data becomes available. As a result, we are able to monitor the direction in which risks are moving or if they are stable. Also, local market analysts provide insight based on their local market intelligence that can influence the direction of risk.

For example, in the chart above, upward pointing green arrows are used to indicate that the risk has increased since the last evaluation, but the risk of problematic conditions arising remains low, nonetheless. An arrow that points downward, on the other hand, is used to indicate that the risk has lessened since the last evaluation. For example, a downward pointing red arrow indicates that risks remain elevated, but have nonetheless decreased since the last evaluation. A sideways pointing arrow indicates that the risk has not changed significantly since the previous evaluation.

Note 3: Results at the CMA level are not segmented by housing type or neighbourhood. They represent an assessment of the entire CMA.

Note 4: The colour scale extends to red only for those risk factors that have multiple indicators signalling significant incidence, intensity and persistence of potentially problematic conditions. As a result, only overvaluation and overbuilding can receive a red rating, since they are assessed using more than one indicator.

HPAA Risk Factors

1. Overheating

Overheating is a possible early indicator of problematic housing market conditions. Overheating is caused by demand running “too far ahead” of the supply of housing. The sales-to-new listings ratio is used as an indicator to assess possible overheating conditions in the existing home market. To identify problematic overheating conditions, the HPAA framework compares the sales-to-new listings ratio to thresholds.

2. Acceleration In House Prices

It is possible that expectations of future house price growth can attract investors who want to benefit primarily from short-term capital appreciation in a given housing market, which can then lead to further acceleration in house prices.

To assess acceleration in real house prices, the HPAA framework adapts a statistical test that was developed to identify periods of accelerating asset price growth. It has been found that speculative activity, fad-based behaviour or excessive leveraging can cause house price growth to accelerate, encouraging additional speculative activity, fad-based behaviour or excessive leveraging, thus propelling prices further upward in a spiral of increasing price growth.

Acceleration in house prices over a sustained period of time can eventually cause house prices to depart from the level warranted by the underlying demographic, economic and financial drivers of housing activity, a condition we refer to as overvaluation.

3. Overvaluation

In the short term, house prices will generally tend to fluctuate around levels consistent with the fundamental drivers of housing activity, like income and population growth, with alternating periods of slight and non-problematic overvaluation and undervaluation while remaining reflective, overall, of evolving market conditions instead of potentially problematic developments.

However, sustained overheating and acceleration in house prices can lead to overvaluation in the housing market, wherein price levels may be driven by intangibles like speculative activity to levels significantly above those that would be consistent with fundamental drivers. Overvaluation is thus assessed when house prices remain significantly above levels warranted by fundamental drivers of demand.

4. Overbuilding

To assess the possibility of overbuilding in the housing market, the HPAA framework uses two indicators: the rental vacancy rate, and the inventory of completed and unabsorbed housing units per 10,000 population. The HPAA framework compares the current level and recent trends in these indicators to risk thresholds.

Table 2: HPAA risk factors and related indicators
Risk Factor Indicator(s)
Overheating
  • Multiple Listings Service (MLS®) sales-to-new listings ratio
Acceleration in house prices
  • MLS® average price
Overvaluation
  • MLS® average price
  • Statistics Canada’s New Housing Price Index (NHPI)
  • Teranet-National Bank House Price Index
Overbuilding
  • Rental vacancy rate
  • Inventory of completed and unabsorbed housing units by 10,000 population

Canada

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