By Alexandra Posadzki
THE CANADIAN PRESS

There is mounting proof that home prices are rising at a faster rate, Canada’s federal housing agency said Wednesday as it increased its risk rating for the national housing market to its highest level for the first time.

Back in July, Canada Mortgage and Housing Corp. said there was little indication of price acceleration, which occurs when home prices are climbing faster than the historical average. But in its latest housing market assessment report released Wednesday, CMHC said it now sees moderate evidence that price acceleration is occurring on a national level.

Accelerating prices are a possible sign that speculation – the buying and selling of homes to turn a profit – is taking place, according to the agency. CMHC also said there was strong evidence that increases in income and population growth have not kept up with the rise in home prices over the last quarter.

The two factors combined prompted CMHC to raise a red flag about possible risks in the national housing market for the first time ever, hiking its risk rating from moderate to strong – something that CMHC signalled earlier this month it was going to do.

However, the agency is predicting that the market will start to balance itself out next year, with both sales and the pace of housing starts expected to decline next year before stabilizing in 2018. “When you have an imbalance like what we’re seeing right now in that the level of prices is beyond what fundamentals can support,
over the medium term, those kinds of things historically have been resolved,” CMHC chief economist Bob Dugan said during a conference call.

“So we would expect to see prices moving more in line with fundamentals rather than the spread just becoming wider and wider.” Royal LePage president Phil Soper said he agrees.

“The market does self-regulate and in only rare cases do you get a Vancouver situation, where in a relatively limited geographic area you see spiking home prices – typically due to a sharp imbalance in supply and demand,” Soper said.

Ottawa’s recent move to tighten rules on insured mortgages will help prevent the chasm between prices and economic fundamentals from becoming too wide, Dugan said. “The imbalances resolve themselves over time, but the greater the imbalance becomes, the harder that correction can be,” Dugan said.

“So having measures that help promote stability in the market can help prevent sharp corrections in house prices.” Earlier this month, the federal government announced a number of changes that will affect the real estate market.

Among them is a new requirement that took effect Oct. 17 where all insured mortgages have to undergo a stress test to determine whether borrowers are still able to make mortgage payments if interest rates rise or their income declines.

Previously, such stress tests weren’t required for fixed-rate mortgages longer than five years. CMHC’s housing market assessment is intended to be an early warning system to alert Canadians about problematic conditions developing in the country’s real estate markets. It covers 15 regional markets and the national housing market as a whole.

CMHC said there is strong evidence of problematic conditions in Vancouver, Calgary, Saskatoon, Regina, Toronto and Hamilton. Edmonton, Winnipeg, Montreal and Quebec City show moderate evidence of such conditions, the agency said.