The Canada Mortgage and Housing Corporation recently announced that the Toronto housing market is no longer at risk of overvaluation. It sounds like good news, but what exactly does this mean?
According to the CMHC, overvaluation is when “House prices are higher than levels supported by personal disposable income, population, interest rates, and other fundamentals.” That means in order for Toronto’s housing market to be at low risk of overvaluation, prices have to be reflective of the listed economic fundamentals.
Seems simple enough, but when I take another look at the CMHC’s Housing Market Assessment, Toronto’s market is still at moderate risk of overheating and price acceleration. What’s the difference between overvaluation and overheating? How is price acceleration any different? Let’s take a closer look together.
When the CMHC says “overheating,” they mean “Sales greatly outpace new listings in the market for existing homes.” So, overheating has nothing to do with prices. It’s more about supply. When sales outpace new listings in the resale market, supply drops and the market tightens. This does however lead to price growth.
“A sustained increase in the growth rate of prices over a given period often indicates that expectations of future house-price appreciation may be excessive,” and this is called price acceleration. This can be a result of overheating for a prolonged period of time.
Overall, the latest HMA says that home prices in Toronto are accurate based on economic fundamentals, but there is a slight risk that price growth may speed up too much if supply can’t meet demand.
I don’t think it would be a stretch to say that the mortgage stress test had something to do with the easing of overvaluation in Toronto’s housing market. Income and interest rates are major factors when qualifying for a mortgage, and I’m willing to bet there were many people who either couldn’t get approved because of the stress test or simply decided to save for longer out of fear of failing the stress test.
Many real estate professionals and organizations are calling for more flexibility in the stress test, but it’s tough to argue with the results. The only flexibility I really want to see with the stress test is for people renewing their mortgage. Right now, the only way to avoid the stress test is to renew with your current lender. This isn’t fair because it limits your options. If you’ve already been approved and have been making your mortgage payments on time, you should be allowed to explore other options and be exempt from the stress test if you change lenders.
So far, 2019 has been a good year for Toronto real estate. We’re approaching a slow period in the year, so I’m already looking forward to 2020!