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Canada’s national housing agency has lowered its risk assessment for the country’s housing sector as sales prices have fallen and the overvaluation of homes in the expensive Vancouver market has shown signs of improvement.

Canada Mortgage and Housing Corp. announced Thursday it has adjusted its national housing risk rating to “moderate” from “high,” marking the first change since October, 2016, when the vulnerability assessment was raised to high risk.

The adjustment comes after average national home prices fell by 5.4 per cent in the fourth quarter of 2018 compared with the same period in 2017 after adjusting for inflation growth, CMHC said. The pool of potential first-time buyers also increased, which has also helped bring house prices more in line with economic and market fundamentals.

CMHC deputy chief economist Patrick Perrier said it is positive news that market imbalances in Canada are improving enough to reduce the vulnerability assessment.

“In fact, that’s a desired outcome, because at the end when there’s an imbalance, what we want is a gradual elimination of this imbalance or a soft landing, rather than crash landing,” he told reporters Thursday. “So this is basically the outcome we are looking for, and this is why we don’t see that as a problem.”

CMHC looks at four factors to assess market risk: price acceleration, overheating as sales outpace new listings, overbuilding when unsold inventories exceed normal levels and overvaluation when price levels outpace market fundamentals such as disposable income or population growth.

The biggest adjustments in CMHC’s latest report are for the rapidly cooling Vancouver market, where sales volumes hit a 24-year low last month and benchmark prices for all types of homes were down almost 9 per cent compared with April last year.

While the overall risk rating for Vancouver was maintained at high, CMHC reduced its overheating assessment to low vulnerability from moderate in its May report, and lowered its assessment of price overvaluation to moderate from high.

Eric Bond, a CMHC market analyst for Vancouver, said the imbalance between home prices and income growth is improving, and slowing sales means there are more listings in the market.

“Buyers have more choice in the market, and the market velocity itself has slowed, so we no longer detect evidence of overheating,” he said.

CMHC did not change any of the four components of its rating for Toronto, but signalled it feels the market is healthier in Canada’s largest city.

The housing agency said the conditions of overvaluation “continue to ease” in Toronto and house prices are more in line with market fundamentals. The inflation-adjusted average sale price was almost unchanged in the fourth quarter of 2018, CMHC said, and the number of young adults in the city grew, which boosts housing demand.

Dana Senagama, CMHC’s manager of market analysis for Ontario, said while some of the market imbalances are easing in Toronto, there is still pressure in the market for apartment-style condominium units, where there is strong demand compared with supply.

“While the steam has been taken off in the single detached house market, there’s still a lot of froth in the condominium apartment market, so we’re keeping a close watch on that,” Ms. Senagama said.

Although CMHC did not change its overall risk ratings for any of the 15 major metropolitan markets included in the study, Mr. Perrier said the national rating was nonetheless reduced to moderate from high because CMHC looks more broadly at the whole country.

“We have other centres that are not in the report, but still are included in Canada,” he said. “So basically, when we talk about Canada we are talking about the national data, it’s not the sum of the centres you see here.”

Aside from Vancouver, the only cities to see any of CMHC’s four risk factors adjusted in the latest report are Montreal and Moncton. In both cases, CMHC said market overheating is increasing, shifting their rating from low vulnerability to moderate vulnerability.

In Montreal, the change was spurred by the significant tightening of supply compared to demand in the resale home market. In Moncton, CMHC said new listings have declined to historic lows while the city’s population climbed at three times the provincial rate last year. The inflation-adjusted average home price climbed by 7.4 per cent in Moncton in the last quarter of 2018 compared to the same period of 2017.

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