Ottawa housing market ‘overheating,’ CMHC says

Housing upward graph

With demand for houses and condos continuing to outstrip supply, Ottawa’s residential real estate market is “overheating,” Canada Mortgage and Housing Corp. said in a new report released on Monday.

The Crown corporation based its conclusion on the relatively high volume of sales relative to the number of new listings. While this has helped to fuel double-digital increases in home prices, the CMHC said it has not yet reached problematic levels.

“Robust growth of the young adult population ... and low mortgage rates kept overvaluation pressures at bay,” CMHC said in its report, which highlighted the city’s large numbers of tech and government workers – employees in industries that largely escaped the worst economic effects of COVID-19 lockdowns.

However, it noted that incomes are growing slower than home prices, which could prove problematic down the road.

“With weaker income, and robust price growth, the potential for overvaluation has increased, particularly once COVID-19 financial supports are removed.”

The report also said there is a low risk of overbuilding in the capital, with the number of completed and unsold dwelling units trending lower – signaling low vulnerability. However, CMHC also highlighted that the seasonally adjusted number of condos under construction trended up to 3,156 units in July, the highest level since August 2014.

“This could raise the potential for overbuilding if demand doesn’t hold up and the vacancy rate rises,” the agency said.

‘Tremendous amount of risk to the economy’

Nationally, Canada's housing market experienced overvaluation in some pockets of the country in the spring amid the COVID-19 pandemic, CMHC said.

In cities such as Victoria, Moncton and Halifax, there was a widening gap between the selling price of houses and the price economists would expect, based on population growth, disposable income, mortgage rates and employment, the Crown corporation said.

That data comes from the agency's housing market assessment, which gives the housing market a grade based on whether homebuilding and rising prices could ultimately affect the stability of the economy. The report doesn't look at whether homes are affordable, but does try to inform homebuyers and lenders on what would happen to the equity in their homes if a sudden economic shock led to a spike in unemployment, for instance.

CMHC says there was a "moderate degree of vulnerability" in the housing market as of the end of June, the same grade the market received in February.

The preliminary report shows the slowdown during the height of COVID-19 lockdown measures, but doesn't include the record-setting sales in July and August, nor does the data reflect the ending of government income supports and mortgage payment deferrals.

Calculating mortgage

Because the report's analysis of home price overvaluation relies heavily on analyzing Canadians' income, the authors suggested that the risk might be underestimated.

"The unprecedented income supports from Canadian governments to households (such as the Canada Emergency Response Benefit and the Employment Insurance Benefits) provide relief to individuals experiencing financial hardship due to the COVID-19 crisis. These sources of income are, however, temporary," said the report.

CMHC economist Bob Dugan said that – despite giving the housing market a steady grade this summer – CMHC still expects a severe decline in home sales and in new construction to come as the economy recovers from the pandemic.

"I don't think we are out of the woods yet. I certainly hope our forecast is wrong," said Dugan in a phone call with reporters.

In May and June, CHMC had given a grim outlook for the housing sector, including a steep decline in housing prices. Although realtors have reported record-high home sales and prices in July and August, Dugan said he is not convinced that there is a "sustainable basis" for the current homebuying demand.

"I'm not confident yet in walking away from some of our predictions, given the tremendous amount of risk to the economy and housing market," Dugan said.

– With reporting by the Canadian Press