Hamilton, Toronto, and Vancouver may be at risk of a rapid home price correction, according to a new report by the International Monetary Fund.
The recent study assessed Canadian Census Metropolitan Areas with borrowing-capacity and net-present-value approaches. According to the IMF’s findings, most Canadian markets had home prices in line with macroeconomic fundamentals as of the end of 2018, except for Hamilton, Toronto, and Vancouver.
“House prices in Hamilton, Toronto, and Vancouver decoupled from fundamentals at the beginning 2016,” reads the report. “The pricing gap in 2018 is around 50 percent for Toronto and Vancouver, and almost 60 percent for Hamilton. House prices would have to drop by roughly 30 percent to align with the current fundamentals in these markets.”
IMF says overvaluation is a concern, but we actually heard a different story from the Canada Mortgage and Housing Corporation in an earlier report based on the first three quarters of 2019. According to CMHC, overvaluation is when “house prices are higher than levels supported by personal disposable income, population, interest rates, and other fundamentals.”
The IMF says Hamilton and Toronto’s home prices don’t align with economic fundamentals, but CMHC says they do. From what we can tell, the IMF findings are based on 2018 figures, and CMHC’s results are based on 2019 figures. That would suggest that a lot has changed over the last nine months, and Hamilton and Toronto possibly came in for a soft landing.
If we look at CMHC’s data, they considered Toronto at risk of overvaluation as late as August 2019, so the easing risk of overvaluation is a fairly recent development. It’s possible that the IMF considered CMHC’s recent data (other CMHC references are cited throughout the report), and have labelled Hamilton and Toronto as overvalued potentially in relation to other Canadian CMAs included in the study.
In the resale market, the average price of a detached home in the Greater Toronto Area is still above $1 million, and a condo averages well over $600,000. And prices are even higher in the new home market. So it would be foolish to say that there isn’t an affordability issue in the GTA.
This is where things get confusing. CMHC says Toronto’s housing market is not at risk of overvaluation. The IMF says it is at risk of overvaluation. And there's obviously an affordability crisis. What’s the answer?
The IMF concludes its report by saying that more supply is required in order to moderate these hot markets; “...policy measures focused on increasing housing supply and/or reducing tax benefits associated with mortgage debt are the most likely to durably improve housing affordability in Canada in the future,” is how the report ends.
With the recent announcement that Toronto will be moving forward with new short-term rental regulations, we should see a lot of supply hitting the resale and long-term rental markets. We’re interested to see if this helps brings prices down gradually or if Toronto will still be at risk of a rapid price correction like the IMF predicts.