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.

Here’s an example of how zoning for more density increases land value.

On July 28, 2016, Vancouver city council approved the Grandview-Woodland Community Plan.

The plan provides direction for residential and other developments in the area bounded by Clark Drive, Nanaimo Street, East 12th Avenue, and Burrard Inlet.

At the southern end of the community is a sub-area called the Commercial-Broadway Station Precinct.

One of the properties in that precinct is 1985 East Broadway, a two-storey detached home built around 1932.

It is located on a block that the Grandview-Woodland Community Plan designated for six-storey residential projects with commercial uses on the ground floor.

Soon after council approved the community plan, the 1985 East Broadway property came on the market on September 21, 2016.

It had a listing price of $2.8 million, which was more than three times its assessed value in 2016.

For 2016, it had an assessed value of $914,400…read more.

A CIBC Capital Markets analysis shows 30% of first-time homebuyers received a down payment “gift.” Not a little help either, but it was the primary source of funds for the majority that received a gift. It’s now occurring at such a scale, it might be driving home prices higher.

Nearly 30% Of Canada’s First-Time Home Buyers Received A “Gift” For Their Down Payment

Buying your first home in Canada isn’t hard. You just work hard, save up, and then ask your parents for the money, right? Well, that’s how it works for a large share of first-time homebuyers today.

The share of first-time homebuyers receiving a “gift” for a down payment is huge. Nearly 30% of first-time homebuyers received a gifted down payment. The share increased by almost 10 points since 2015, which is a huge demographic shift. Imagine if an extra one in ten adults under 40 needed their parents to help them cross the street? It would be obviously visible, not just a fringe amount. Now that’s not the total, just the increase in people who received help. It sounds small, but it’s huge…read more.