Canadian home prices 20% overvalued, says Fitch

Canada's housing market is as much as 20 per cent overvalued, according toa new report byratings agency Fitch,which uses a new methodology taking into account sustainable prices andwhat would happen in a U.S.-style meltdown.

Although the agency says prices may be 20 per cent too high in some markets, in reality Fitch says it's unlikely for prices to suddenly drop by that amount because of price momentum and inflation.

Fitch says the actual price decline could be closer to 10 per cent, taking place over several years.

"If growth halted and prices began to drop, it would be expected to take several years for home prices to revert to their sustainable values," the agency says.

Of course, the decline could vary greatly by region. Fitch says prices in Alberta would likely fall by several per cent, while in B.C. and Quebec the correction could be as high as 15 per cent.

This gradual cooling of the housing market is close towhat the federal government has been trying to accomplish with tougher mortgage rules and warnings over household debt.