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A home for sale in Toronto.Fred Lum/The Globe and Mail

House prices in parts of Canada may appear to be increasingly out of reach for many Canadians, but lofty prices aren't about to sink any time soon.

In fact, Canada's homes are only "modestly" overvalued on average, Canada Mortgage and Housing Corp. says in an analysis, and there is no evidence that any dramatic reversal is in the cards.

If there is any risk of overvaluation it is not in Vancouver – where home prices continue to raise eyebrows – but in Montreal and Quebec City, where prices have outpaced income increases, the report says. Still, the market is becoming more balanced, even in those cities. There is also a modest risk of homes becoming overvalued in Toronto, Calgary and Halifax, the study says.

Over all, "there is little risk of a housing price correction," CMHC chief economist Bob Dugan says. "There is only a modest amount of overvaluation, and other risk factors don't seem to be present now in Canada."

That conclusion stems from CMHC's House Price Analysis and Assessment, a regular internal study that has not been made public in the past. CMHC released some of the details of its HPAA as part of a move to issue more data about the state of the country's housing market.

The HPAA data look at several risk factors in the housing market, including overheating (where demand runs ahead of supply), price acceleration, overvaluation and overbuilding.

Nationally, house prices are only slightly higher than where they should be relative to disposable income and population growth, the study shows. Overheating and price acceleration are also not a concern on a national basis.

When it comes to overbuilding of new units, the main regions of concern are Montreal and Toronto. In those cities, the number of units under construction is "elevated" relative to the population, the report says. This could generate concerns if the units are completed but not sold, CMHC said.

Benjamin Tal, an economist at Canadian Imperial Bank of Commerce who has criticized the lack of analytical information on the housing market, said getting the CMHC data into the public domain is very useful.

People are confused about the housing market because it is possible to choose any specific statistic to make a point, he said.

"You can look at the price-to-income ratio and conclude immediately that we are in a bubble. Or you can count cranes in Toronto and Vancouver and you conclude that everything is crazy."

The CMHC analysis, on the other hand, is long-term, consistent and broad-based, so "it adds a lot to the debate," he said.

The CMHC's Mr. Dugan did warn, however, that his organization's relatively optimistic conclusion is "backward looking," in that it models data from the past. "It assumes that the world of the future will unfold much like it did in the past," he said. "There are dangers of driving while you are looking in the rear-view mirror."

He also noted that Canada's housing market is not monolithic, and cities and regions need to be examined individually.


Despite the anecdotes involving incredibly overpriced homes in Vancouver, the CMHC study sees no major issues there. House prices are "supported by local growth in personal disposable income and long-term population growth," the report said. Mr. Tal of CIBC said average prices may be out of reach, but they are skewed by very expensive properties. "There are many pockets in Vancouver where house prices are not as crazy as perceived," he said.


The strong growth in house prices, combined with more modest gains in disposable incomes, has prompted CMHC concerns about overvalued properties. Mr. Tal said Calgary had a significant home-price correction during the recession, and has now "overshot" a bit in its recovery. The key factor there, he said, is the level of oil prices. If they are high, the economy prospers and people can afford more expensive homes. "It's a different cycle" from the rest of the country, Mr. Tal said.


In Toronto, there is a degree of overvaluation because personal disposable income has not kept up with house-price growth, the CMHC analysis said. Another risk factor in Toronto is that there is a lot of construction going on, particularly in the condominium market, and a price correction could occur if demand doesn't match supply. What's key is that the target market for new condos – young people and investors – keeps growing.


In Montreal, house prices don't fully reflect the slow growth in the pool of first-time home buyers. That, combined with slower growth in personal disposable income over the past decade, means some houses are overpriced. At the same time, there has been a bit of a building boom, and the number of units under construction relative to the population is near a historical peak, the CMHC said.