Published on November 24, 2014, at 1:18 p.m. | Updated on November 24, 2014 at 4:03 p.m.

Real estate: risk of overvaluation in Montreal and Quebec City

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CMHC reports that in Montreal, the number of housing units under construction relative to the number of residents is approaching a “historic high.”

PHOTO ARCHIVES THE PRESS

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Julien Arsenault
The Canadian Press

Unlike the rest of the country, the risk of overvaluation in the real estate markets is “particularly evident” in Montreal and Quebec City, but the situation is improving, according to the Canada Mortgage and Housing Corporation (CMHC).

In its Housing Price Analysis and Evaluation (HPE) framework, the results of which were released on Monday, the organization estimates that a “moderate risk” looms over these two cities, particularly because the growth in the number of homeowners has slowed since 2012.

CMHC reports that in the metropolis, the number of homes under construction relative to the number of inhabitants is approaching a “historic high,” which calls for better management of the current situation.

The supply of new properties is also high relative to the number of inhabitants in Quebec City, but the organization believes that it remains within “historical norms.”

“In Montreal and Quebec City, the risk of overvaluation reflects a slowdown in the growth of the 25-35 age group observed since 2012,” the Corporation points out.

According to the organization, this situation is also attributable to the growth in disposable income, which has not kept pace with housing prices since the early 2000s in these two locations.

CMHC Chief Economist Bob Dugan also uses this analysis to issue a warning about excessive construction in Montreal and Toronto.

“If these homes are completed but not sold, it could result in overbuilding,” he points out. “Builders will need to direct new demand in appropriate proportions to homes currently under construction but not yet sold.”

A moderate risk of overvaluation is also observed in Toronto, Calgary, and Halifax, but no overheating or acceleration is noted, CMHC points out.

The results of its analysis include those for the Canadian market and eight census metropolitan areas: Montreal, Quebec City, Vancouver, Calgary, Edmonton, Toronto, Ottawa, and Halifax.

Nationally, CMHC notes “modest overvaluation,” although most markets remain in line with factors such as employment and interest rates.

From January to September, prices in transactions completed through the Multiple Listing Service (better known by its acronym MLS) fell by 1% in Quebec City, but rose in Montreal (1.9%), Vancouver (6.3%) and Toronto (6.9%).

In a research note published last week, CMHC suggested, based on indicators such as inflation and exchange rates, that property prices in Canada would remain higher than in the United States.

The organization believed that this could indicate that prices in Canada may be overvalued.

Concerns about the Canadian real estate market are at the top of the list for many economists and policymakers, who want to avoid a crash like the one that occurred south of the border during the most recent financial crisis.

However, Bank of Canada Governor Stephen Poloz and Federal Finance Minister Joe Oliver have attempted to allay these fears in recent months.