Fitch Ratings Estimates Alberta Real Estate Overvalued By 15%

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)

Mortgage Wars

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:

  1. increase minimum down payment requirements,
  2. demand a more thorough implementation of taxes including a 20% capital gains tax on real-estate,
  3. 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…

9 responses to “Fitch Ratings Estimates Alberta Real Estate Overvalued By 15%

  1. I wonder how Alberta would break down by city?

  2. Pat, I’m curious of the same thing. I have an email into Fitch asking if they have their their data narrowed down by city and if they can release some general info for us. I’ll post if they respond.

  3. Hey Mike,
    Here is a chart you might be interested in. I graphed WTI, WCS and Brent Crude from 2005 to 2012.

  4. Thanks for that, Kevin.

    For those interested in reading why this spread in oil prices is important, RBC had a report earlier this year on the “Macroeconomic impact of the WCS/WTI/Brent crude oil price differentials“, and ATB had a brief research note, “Oil prices not created equal.

  5. Scotia Economics, Daily Comment, Mar 5th

    “Once a beacon of resilience, Calgary’s volume of home sales slipped in February over the same month last year. The drop (-1.3%) was not major, but is notable because Calgary had been a point of resilience until now.

    “We wouldn’t make too much of this one print since high volatility around seasonally low sales volumes in the dead of winter is to be expected, but it’s a potential warning sign”

  6. Just heard back from Fitch with regard’s to Pat’s comment:

    “We do not have projections for specific cities but only the 4 largest provinces (BC, ON, QC, AB) in addition to a national projection.”

    That’s too bad.

  7. I don’t think it’s gonna drop 15%. The market is too strong. I’ll believe it when I see it!

  8. Market gonna drop 15% did not have any sense because reacently I had read that the whole real estate market is increasing in Alberta, Calgary compare to 2011 year.

  9. Anonymous & Kernick: please note that a 15% overvaluation doesn’t equate to a 15% price drop as Fitch explained in the release.

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