At the national level, Canada’s housing market showed “moderate evidence of overvaluation” in the second quarter, according to the Canada Mortgage and Housing Corporation.

“The evidence of rising imbalances in some local housing markets coupled with the general weakening of housing market fundamentals results in a moderate degree of overall vulnerability being maintained for the Canadian housing market,” reads the agency’s Housing Market Assessment (HMA) released this week.

The data covers up to the end of June, during the height of the COVID-19 lockdown. It doesn’t include the record-setting sales and home price increases seen in July and August.

Still, CMHC stands by its May housing forecast, which suggested a decline in prices between 9% and 18% from pre-pandemic levels before starting to recover in the first half of 2021.

“When I say I stand by our forecasts, it’s really with respect to what are the broad trends we expect moving forward,” CMHC Chief Economist Bob Dugan said during a call with reporters. “When I look at the housing market there are a tremendous number of risks.”

However, CMHC CEO Evan Siddall recently walked back his now infamous characterization of the impending “deferral cliff,” which referred to the end of lender-granted mortgage payment deferrals this fall for those financially impacted by the pandemic.

“The ‘deferral cliff’ doesn’t worry us right now,” Siddall tweeted. “But (a) we haven’t yet felt the full economic impact of the coronavirus and (b) too much debt hurts future growth prospects (exactly b/c people will pay their mortgages) since they will spend less. And debt is increasing.”

“Vulnerable” Housing Markets

Housing markets identified as showing overall “moderate” vulnerability in Q2, which incorporates risks of overheating, price acceleration and overvaluation, include: Toronto, Vancouver, Victoria, Hamilton, Ottawa, Moncton and Halifax.

In Eastern Canada, Moncton and Halifax are showing moderate signs of overvaluation, while a sustained increase of prices in Ottawa and Montreal are signalling moderate price acceleration. All had registered price growth at the onset of the pandemic, and continued to post gains in the second quarter.

In the Prairies, Edmonton’s and Calgary’s economic woes continued, aggravated by the onset of the pandemic. CMHC reported that home prices in both markets fell in Q2, but that the rate of decline was “below that suggested by housing market fundamentals,” leading to an increase in overvaluation estimates.

Overvaluation in the national housing market peaked in 2016-17, before falling back to a balanced level by the end of 2019. But disruptions caused by the pandemic have “weakened some of the fundamental determinants,” primarily steep declines in employment and hours worked, which lowered income in most regions, CMHC noted.

“In line with action taken by the Bank of Canada in March to support the economy, the nominal 5-year mortgage rate declined. In normal circumstances, this action would support the housing market,” CMHC added. “The COVID-19 pandemic has changed many behaviours, however, and resulted in growth in the headline Consumer Price Index declining. Such a decline resulted in an increase in the real mortgage rate.”

Why is all of this data important?

As one of the country’s three mortgage insurers, CMHC takes this data into consideration in its overall risk assessment when deciding whether to approve insured mortgage applications. Local market conditions are one factor that plays into that approval decision.