Are Canadian Real Estate Prices Overvalued? (2024)

So, does the notable increase equate to an overvalued Canadian real estate market?

Are Canadian Real Estate Prices Overvalued?

Economists will debate the fundamentals of the Canadian real estate market. In April 2023, Moody’s Analytics released an in-depth report that assessed the struggles ahead for Canada’s housing market. The economists noted that real estate markets have been “uneven across provinces.” So, Toronto and Vancouver are prime examples of an overvalued region. However, the Prairies have maintained superior affordability. Here is what the firm’s economists noted:

“An unprecedented number of metro areas are overvalued, with prices exceeding their fundamental value by more than 10 per cent. Serious overvaluation is not limited to Toronto or Vancouver but also includes the surrounding Golden Horseshoe region. By contrast, overvaluation is not a problem in the Prairies. Some of the undervalued housing markets, especially in Alberta and Saskatchewan, will do better mainly because they have retained better affordability. The Prairies had a much smaller run-up in prices during the pandemic and also experienced weak price growth in years preceding it.”

However, the good news is that more Canadian housing markets are expected to be in balance, according to the 2024 Canadian Housing Market Outlook by RE/MAX Canada. Here is a breakdown:

• Balanced: 41 per cent
• Seller: 28 per cent
• Buyer: 21 per cent
• Mixed: 4 per cent

In the coming years, housing prices are expected to climb. Still, market watchers are less concerned about a crash comparable to the United States during the global financial crisis nearly two decades ago, according to a recent Reuters poll.

However, while some will purport that Canada is sitting on top of the biggest housing bubble in the world, a chorus of experts note that the country is enduring lacklustre fundamentals rather than an artificially supported marketplace. Indeed, industry observers allude to growing immigration levels, historically low interest rates, and housing shortages that will fuel price growth.

Even if current conditions somehow reversed, the Royal Bank of Canada’s (RBC) latest forecast is that housing prices might tumble by one per cent nationwide in 2024. They would then rise more than three per cent next year. “The outlook for this year varies considerably by province, though, with prices project to rise 2.2 per cent in Alberta and fall 2.0 per cent in Ontario,” RBC economist Robert Hogue wrote in a Feb. 2024 note.

Deflating Housing Bubble Risks

In recent years, the real estate sector paid close attention to the annual UBS Global Real Estate Bubble Index. Toronto has typically made it in the top five, joining other major cities, such as New York, London, Paris, and Los Angeles. Canada’s largest urban centre ranked second in 2021.

For the Swiss wealth management firm’s 2023 rankings, Toronto placed seventh, ahead of Geneva and behind Hong Kong.

The financial institution noted that Toronto’s bubble risks are deflating, although there are still challenges ahead.

“Between mid-2019 and mid-2022, real prices in Vancouver increased by 25 per cent and by almost 35 per cent in Toronto, while household leverage rose at a fast pace,” the group said in a report. “A mix of increasing financing costs and higher mortgage stress test rates tipped the scales, and prices in Vancouver and Toronto have corrected by more than 10 per cent in inflation-adjusted terms since mid-2022. But demand for living space in these cities is rising steadily, and the pressure is shifting to the rental market.”

Could rate cuts refuel the Toronto real estate market? It all depends on what the Bank of Canada (BoC) does in the coming months.

What About Mortgage Rates?

The Bank of Canada (BoC) is widely anticipated to cut interest rates. While the central bank has not pointed to an exact time, the futures market is pencilling in a June pivot. At the same time, the monetary authorities have been reluctant to cut rates even as inflation slows. The reason? The housing market.

BoC chief Tiff Macklem noted that the housing market is picking up, but a rate cut could fan the flames of home-buying. “Could that rebound be stronger than we’ve expected? Yes, it could,” he said. “And that is an upside risk.”

“We know everybody would like to see lower inflation and lower interest rates. So would we,” Macklem added. “But we need to balance the risks of keeping monetary policy this restrictive for too long against the risks of lowering prematurely and jeopardizing the progress we’ve made.”

As for where mortgage rates could be headed by the year’s end, the conventional five-year fixed mortgage rate could ease to a range of a high three per cent and a low four per cent. Today, it currently hovers around six per cent.

“A rate cut would add fuel to what is already looking like a hot spring market,” James Laird, co-CEO of Ratehub.ca and president of CanWise mortgage lender, told CBC News. “The Bank of Canada will be hesitant to stoke demand in the housing market, given how unaffordable housing already is.”

Investors believe the central bank will pull the trigger on three quarter-point rate cuts this year.