Price deviations will likely play a crucial role once rate increases begin next year, Moody's says
Major Ontario and British Columbia markets are currently hotspots of housing overvaluation, according to Moody’s Analytics.
However, while Toronto (39.53% deviation from the average national price as of Q2) and most of the Golden Horseshoe region’s metropolitan areas are experiencing overvaluation, these markets “have also shown less sensitivity to overvaluation in the historical data since 2005, so they will likely experience less downward price pressure,” Moody’s said.
The pressure is markedly more pronounced in BC, “not just for Vancouver (22.95%) but for the other three metro areas as well,” Moody’s said. “Given their overvaluation, the British Columbia metro areas will continue to have downward pull on their house prices due to reduced affordability.”
In stark contrast, overvaluation is not a major concern in the Prairies, with Calgary (-30.92%), Edmonton (-29.87), and Saskatoon (-31.78%) homes remaining “seriously undervalued” despite recent price increases, Moody’s said.
However, Quebec is an important study in contrasts, the agency said.
“Montreal (24.96%) is the only metro area in Quebec not in the ‘correctly valued’ range of plus or minus 10% and will continue to experience a downward pull on its house prices due to reduced affordability,” Moody’s said. “House prices in Montreal have also shown greater sensitivity to overvaluation in the historical data since 2005, so they will likely experience more downward price pressure compared with Toronto or Vancouver.”
These dynamics will play a crucial role once rate hikes begin in earnest by next year, Moody’s said.
“The macroeconomic forecast implies a deceleration of national house price growth as higher mortgage rates kick in,” Moody’s said. “Some of the undervalued housing markets, especially in Alberta and Saskatchewan, will do better despite weaker economic fundamentals precisely because they have retained better affordability, while Montreal will see a house price correction for at least the next year.”