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A sold sign is planted outside a home in Toronto. For two consecutive months, July and August, national home resales and selling prices hit record highs, with ultralow mortgage rates and renewed consumer confidence driving demand.

Melissa Tait/The Globe and Mail

The federal housing agency still expects a steep decline in home prices, as the rise in novel coronavirus cases leads provinces to restrict activity and threatens the country’s economic recovery.

For two consecutive months, July and August, national home resales and selling prices hit record highs, with ultralow mortgage rates and renewed consumer confidence driving demand.

But Canada Mortgage and Housing Corp. (CMHC) stands by its prediction for average home prices to drop between 9 per cent and 18 per cent from peak to trough.

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“There remain a lot of risks in the housing market, in the economy for that matter,” Bob Dugan, CMHC’s chief economist, said on a call to discuss the agency’s latest housing market assessment.

Released on Monday, the report showed that the country had a “moderate” degree of vulnerability to a housing correction as of the end of June, with Ottawa, Moncton and Halifax moving to “moderate” from a “low” level last year.

The quarterly report, which is based on preliminary data from the second quarter, is designed to detect vulnerable housing-market conditions across the country and examines price acceleration, overvaluation, overheating and overbuilding in the major cities. CMHC determines whether a region is overvalued when house prices stay significantly above what the agency says are the levels warranted by disposable income, population, interest rates and other housing-market fundamentals.

Although housing markets in Toronto, Ottawa, Montreal and most of Southern Ontario have been on fire since June, CMHC’s assessment found that Toronto and Hamilton were moderately at risk of a correction.

However, Mr. Dugan said some of the overvaluation is “likely underestimated” because of the vast amount of federal government aid. The Canada Emergency Response Benefit for those who lost income from the pandemic paid $500 a week for up to 24 weeks. After early October, the amount will be lower.

“The unprecedented income supports from Canadian governments to households, being temporary, likely overstate the fundamentals underpinning house prices,” he said.

Mr. Dugan pointed out that government aid “significantly boosted” disposable income in the second quarter. Without that aid, disposable income levels actually fell by 8.9 per cent from the first to second quarter this year, he said.

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Other headwinds facing the housing market include sustained unemployment and mortgage deferrals, many of which are ending this fall, and could depress home prices if mortgage holders are unable to resume payments and are forced to sell their properties en masse.

“I don’t think we are out of the woods yet. I certainly hope that the forecast is wrong but I am not confident in walking away from some of our positions,” Mr. Dugan said. “A lot of economic risks remain so we are sticking with our forecast.”

CMHC’s forecast, released in May, also sees home building plummeting by up to 70 per cent this year. However, housing starts reached their highest level in 13 years in August on a seasonally adjusted basis.

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