Ontario house prices may be 25% overvalued due to condo threat

Average house prices across Ontario could be overvalued by as much as 25 per cent in part because of an oversupply of condominiums in Toronto, ratings agency Fitch warned Wednesday.

According to Fitch, a glut of condos could be a threat to the economy and a drag on future price gains. There are currently 80,000 condominiums being built in the province, the vast majority concentrated in downtown Toronto.

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That's 50 per cent higher than the level seen four years ago, when the current condo building boom was beginning.

"The significant boost to supply implied by this construction overhang could present a problem for continued price growth, with the market potentially becoming oversaturated," Fitch directorStefan Hilts said."As a large number of units come on line, prices may soften, which could reverberate throughout the Canadian economy."

While the company figures prices are probably 25 per cent overvalued based on historical trends for things likeincome, unemployment, and mortgage rates,that's not to say the ratings agency is predicting prices will fall by that amount. Because Canadian mortgages are relatively safer than those in some other places, Fitch said there's unlikely to be the same level of mortgage defaults, which can often start a chain reaction downwards for prices.

Since 2009, home prices in Ontario have grown by an average annualized rate of 7.9 per cent, Fitch noted.

Lower prices would reduce the incentives to build further condo units, which could hit employment in the construction sector that has been one of the big drivers of jobs in the province, Hilts said.