Fitch Ratings, a global rating agency, currently estimates that home prices are overvalued by approximately 20% in real terms across Canada with regional variations. Based on a new proprietary sustainable home price model (SHP), it is able to take a forward-looking view on the potential for home price declines and the impact on borrower equity when projecting defaults and losses. (Source)
So what are the regional variations? Estimates of the overvaluation are:
- Alberta: 15%
- British Columbia: 26%
- Ontario: 21%
- Quebec: 26%
But “because of the effects of inflation and price momentum, it is not expected that prices would drop by this amount,” the report added.
“Actual nominal [price] 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,” it said.
Fitch ratings states that among the four largest provinces, Alberta is the least overvalued because it already went through a house price correction when crude oil prices fell in 2008, and prices have not returned to their 2007 peak. (Read Globe & Mail article)
In other news today, from Scotia Economics:
“Rate wars are heating up again in Canadian housing markets, and this has attracted Canadian finance minister Jim Flaherty’s attention. I’m still not entirely convinced that mortgage wars are the only key financing factor to watch in the outlook for variables like housing starts and construction jobs.
With pretty much all of the run up in both indicators being due to rising condo construction over recent years, what has prompted the cooling may have considerably more to do with a turn in the leveraged investor’s math than tighter mortgage rules. Rental income streams have not kept up with higher carrying costs for the typical median new build.
Highly leveraged private equity was funding a lot of the downpayments at the sales office openings for new projects. This argument is at the center of my concern that leverage is more prevalent than often judged in Canadian real estate. A paucity of quality data on financing and ownership in Canadian real estate is problematic in this regard.”
Chinese Government Curbs House Appreciation
Scotia Economics also reports that the Chinese government passed new home ownership guidelines over the weekend designed to curb home price appreciation.
The new regulations hit Chinese equity markets very hard, driving down the real-estate holdings and services component of the SE Composite by 7% intraday, and knocking 6.2% off of the construction and materials sub-sector.
The new regulations included:
- increase minimum down payment requirements,
- demand a more thorough implementation of taxes including a 20% capital gains tax on real-estate,
- Expand the reach of home purchase regulations that make non-resident, 2nd and 3rd homes more burdensome from a taxation perspective so that they now apply to all districts (formerly they were confined only to select districts).
The policy changes are a response to the resumption of very rapid home price growth as the wave of credit introduced into the system filtered into the real-estate market. A credit-fueled bubble? Why does that sound familiar…