High property prices and buyer expectations of sustained price growth have put the country’s property market at increased risk of a correction, the Canadian housing authority said on Tuesday.

Canada Mortgage and Housing Corporation (CMHC) raised its national risk level from moderate to high in its housing market valuation report for the third quarter.

This is the second time that the national risk level has been raised to a high value. Prior to May 2019, the indicator had marked the vulnerability of the country’s real estate market as “high” for the last 10 consecutive quarters.

“The exceptionally strong demand and rise in home prices in the wake of the pandemic may have contributed to increased expectations for continued price growth for homebuyers in several local housing markets in Ontario and eastern Canada,” said Bob Dugan, chief economist at CMHC, in a press release. “This in turn could have resulted in more buyers entering the market than was justified.”

Improved real estate fundamentals in the first half of the year, such as historically low interest rates, government subsidy programs and the introduction of mass vaccination programs, led to spikes in purchasing power, disposable income and employment, CMHC found. However, these factors were insufficient to justify the rapid rise in prices during this period.

The housing authority said the high vulnerability at the national level was “largely a reflection of the problematic conditions in several local housing markets in Ontario and eastern Canada.” This included raising Montreal’s vulnerability from moderate to high.

Vancouver’s market vulnerability, on the other hand, has been reduced to a “low” rating following a slowdown in price growth and home sales.

Regional breakdown of CMHC

Six of the Census Metropolitan Areas (CMAs) tracked by CMHC are now in the high risk zone, up from five in the second quarter.

Here is a quick summary of the factors affecting some of these metropolitan areas:

  • Greater Toronto Area (high): “Although existing home sales began to decline and pandemic-related purchasing activity subsided in the second quarter of 2021, the supply of demand … contributed to the continued price acceleration.”
  • Montreal (high): “… real estate prices have risen sharply and are well above the level justified by fundamentals such as earned income.”
  • Ottawa (high): “… home sales have been declining since April 2021, but sellers’ market conditions still prevail as offers remain at all-time lows and put pressure on price growth.”
  • Moncton (high): “… prices continued to rise in 2021 (23% since the beginning of the year), which reflects the underlying gap between supply and demand for housing.”

Saskatoon, Regina, Winnipeg and Quebec continue to have “low” levels of vulnerability in their housing markets, CMHC said.

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