Housing prices 20% overvalued in Canada, Fitch warns

Canada's real estate market is as much as 20 per cent overpriced, the Fitch ratings agency said today, joining Morningstar research in predicting a sharp correction on house prices.

Fitch said the federal government should take more measures to slow down borrowing on homes.

The warning comes as the Teranet-NationalBank national composite house price index showed home prices rose 4.5 per cent in June compared to a year earlier.

Teranet said the pace of home price inflation slowed to its lowest rate in six months, down from 4.6 per cent in May.

For the month, the Teranet price index was up 0.9 per cent.

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There were large variations across the country in the rise in prices of single-family resale homes with the large urban markets seeing the strongest surge in prices.

Calgary prices were up 8.1 per cent compared with a year ago, Hamilton prices were upby 7.3 per cent and Toronto and Vancouver housing was 6.1 per cent more expensive.

But there were more modest gains of 1.7 per cent in Victoria, three per cent in Montreal and 3.5 per cent in Edmonton, compared to a year earlier.

Oversupply in Ottawa, Halifax

Prices in Ottawa-Gatineau fell by 1.7 per cent, while Quebec City prices were down 2.4 per cent compared to a year ago.

Randall Bartlett, a senior economist at TD Bank, said there was an oversupply of homes in Quebec City, Ottawa and Halifax, leading to falling prices.

The surge of house resale activity that normally takes place in the spring led to a strong pace of sales in June.

But Bartlett said there were signs the market might slow later in the year.

With the housing market having now shaken off the winter blues, price are continuing to rise at a solid pace. That said, the continued deceleration in price growth on a year-over-year basis may be an indication that the Canadian housing market is becoming more balanced, he wrote in a note to investors.

We expect to see the cooling trend continue through the end of 2015. This view is premised on rising prices encouraging strong growth in new listings while the number of newly competed housing units remain elevated, both of which will boost supply and weigh on prices. At the same time, interest rates are likely to grind higher in Canada, resulting in reduced affordability, he said.

The majority of analysts, including the Bank of Canada, forecast a soft landing for housing, probably when rates go up later in the year.

But as price increases continue and mortgage holders become increasingly stretched, the OECD and World Bank have warned Canada over housing.

Former finance minister Jim Flahertyhad attempted to cool the market by tightening mortgage rules and reducing amortization periods.

But Fitch believes those measures didn't go far enough.

"We believe high household debt relative to disposable incomehas made the market more susceptible to market stresses likeunemployment or interest rate increases," the agency said in its assessment issued Monday.