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Are Canadian Real Estate Prices Overvalued?

The COVID-19 pandemic supercharged a market that already favoured sellers. With available listings hitting a record 14-year low before the pandemic, it was no wonder that housing prices had soared upward, with the Canadian Real Estate Association forecasting the national average home price would rise a whopping 19.9 per cent on an annual basis to $690,000 in 2021. Low interest rates, economic support and lockdowns that drastically shifted the consumer appetite, contributed to a sharp increase in demand and, consequently, price growth across virtually every Canadian housing market.

But did these changes cause real estate prices to become overvalued? According to Moody’s Analytics, a leading credit rating agency, this was most certainly the case. The firm’s forecasting model believed that Canadian real estate markets were overvalued by up to 91 per cent, with a 22.59-per-cent average in urban markets. At the time of the report, the good news: despite this label, Moody’s did not expect the bubble to burst, causing a housing crash. So, we can all let out a collective “phew”!

Can Higher Mortgage Rates Put a Dip in Canadian Real Estate?

Though real estate prices were overvalued, there was no expectation that those prices were going to fall. Expectations were that higher mortgage rates would flatten the growth – and this turned out to be an accurate prophecy nationwide! As mortgage rates rise, their model highlighted low to no price growth. Moody’s predicted that urban housing prices would rise 2.63 per cent from Q4 2021 to Q3 2022.

Let’s explore price trends according to Moody’s:

The Toronto Real Estate Market

The Toronto housing market was overvalued by almost 40 per cent in Q2 2021, nearly double the national average. With no crash on the horizon, the numbers were forecast to hold steady in the coming years, with a growth of 0.86 per cent in 2022, followed by 0.05 per cent, Moody’s noted in the report. It was bad news for anyone hoping the prices could dip to more affordable levels since residential property valuations remained north of $1 million in Canada’s financial capital.

So, what happened one year after the report first came out?

According to the Toronto Regional Real Estate Board (TRREB), home sales plummeted 38.2 per cent in 2022, totalling 75,140 transactions. Moreover, the number of new residential listings tumbled more than eight per cent to 152,873 units. The average selling price held steady in 2022, although the numbers were skewed by a strong start to the year, as price growth moderated beginning in the spring. Overall, the typical sales price for a home in North America’s fourth-largest city surged nearly nine per cent to $1,189,850.

The Vancouver Real Estate Market

The good news for the Vancouver housing market was that its overvaluation was not at the level of Toronto. According to Moody’s, the Vancouver market was overvalued by almost 23 per cent in Q2 2021. On the horizon is price growth of 1.17 per cent in 2022 and 1.32 per cent in 2023.

One year later, the Vancouver housing market’s performance was similar to Toronto’s. Data from the Real Estate Board of Greater Vancouver (REBGV) showed that residential home sales plunged more than 34 per cent year-over-year in 2022, totalling 28,903 units. The MLS® Home Price Index composite benchmark price slumped 3.3 per cent to $1,114,300. Home listings also tumbled 13.5 per cent to 62,265 units.

The Montreal Real Estate Market

Unlike Vancouver and Montreal, Moody’s stated that the Montreal real estate market was forecast to see a correction in prices. Though home prices were almost 25 per cent overvalued in Q2 2021, prices are forecast to fall. Moody’s predicted a decline in 2022 and 2023 of 5.29 per cent and 7.21 per cent, respectively.

The Most Overvalued Housing Markets Are All in Ontario!

Neither Toronto, Montreal, nor Vancouver can lay claim to the most overvalued market in Canada; that honour belongs to Niagara. The Niagara area, including St. Catherine’s, is an astonishing 90.8 per cent above trends in Q2 2021, per Moody’s. There are small dips expected, but they are minor corrections in comparison to these massive gains.

Joining the Niagara real estate market near the top of the leaderboard of overvalued markets were Peterborough, Windsor, Hamilton and London.

Saskatoon And Calgary Are the Most Undervalued Real Estate Markets

On the flip side of Niagara, you will find Saskatoon, a real estate market that has demonstrated strong growth but has admirably succeeded in constraining the swelling of property price tags. Last year, according to the Saskatchewan Realtors Association (SRA), sales fell 15 per cent from last year, and average home prices edged up just one per cent to $359,557.

Prices have dropped 31.78 per cent below Q2 2021 in the Saskatoon housing market. Some good news for Saskatoon homeowners who have seen the value of their homes dip; there is forecasted growth for 2023, with 9.7 per cent growth in 2023.

Calgary is another Western market that has seen real estate values drop since the oil crash in 2015, says Moody’s. According to their analysts, the market was 30.9 per cent below trend in Q2 2021; however, prices were expected to grow over the next few years, including a nine percent jump in 2023. Last year, Calgary Real Estate Board (CREB) figures revealed that home sales plummeted 30.6 per cent year-over-year, but the average total residential price swelled 7.8 per cent to $518,800.

The Future of Canadian Real Estate

Looking into 2023 and beyond, many wonder if there is any more relief coming to Canada’s urban housing markets. Will prices dip or only climb further out of reach for the average homebuyer? Moody’s forecasting and predictions don’t paint a positive picture for those looking for more affordable or accessible housing costs. The organization anticipates that there will be a peak-to-trough decline of approximately 10 per cent by the end of 2023.

Prices may start climbing again in 2024 as heightened immigration, a dovish tilt in monetary policy by the Bank of Canada (BoC), and a fully recovered labour market drive wage and salary growth. Add to this the return to in-office work, indoor dining, and large social gatherings, and the demand for housing close to the urban core may continue to swell at the end of the central bank’s quantitative tightening cycle.

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