Canadian real estate is very overvalued, according to a massive credit rating agency. Moody’s Analytics released its Canadian real estate model this week. The firm’s model shows markets are overvalued by up to 91% across the country. As disastrous as that sounds, the firm isn’t expecting a big housing crash. The baseline model shows low to no price growth, as mortgage rates rise.

Higher Mortgage Rates Will Drag Canadian Home Prices

Canadian residential real estate prices are massively overvalued but aren’t expected to fall. The firm’s latest models show urban markets have deviated 22.59% above the trend as of Q2 2021. This is a huge overvaluation, but the firm doesn’t expect home prices to fall at the national level. At least in nominal terms, and with a few regional exceptions.

Higher mortgage rates are expected to grind growth down to a standstill. Urban prices are forecast to grow 2.62% over the next year (from Q4 2021 to Q3 2022). Another 1.38% growth is forecast to follow in the 12 months after. Not the end of the world, but interest rates are forecast to be higher than price growth in the last year. In the baseline, they are essentially concluding a lot of future growth was just borrowed. Markets will grow into their valuations.

Toronto Real Estate Is 40% Overvalued

Toronto real estate is massively overvalued at these levels, but no crash is forecast. Home prices are 39.5% above the trend as of Q2 2021, almost double the national numbers. Over the next year, prices are forecast to grow just 0.86%, followed by an 0.05% decline in the year after. No, you read that right. It was a strangely precise forecast of virtually no drop in that last year. When do we start the bailouts?

Vancouver Real Estate Is 23% Overvalued

Vancouver real estate is overvalued, but not to the same extent as Toronto. Home prices are 22.95% above the trend as of Q2 2021, nearly half the rate of the country’s largest market. Slow price growth is forecast at 1.17% over the next year, and 1.32% in the following year.

It may surprise some to see Vancouver is less overvalued than Toronto. Especially considering the city is so much more expensive. The conclusion is consistent with findings from the CMHC and IMF. That is, it’s still overvalued — just not as overvalued…read more.