Canada’s housing agency said the country is now at high risk of a sharp correction in home valuations as the continued appreciation in prices becomes unmoored from economic fundamentals.

The Canada Mortgage and Housing Corp. raised its market risk assessment to high from moderate on Tuesday, in a report showing both activity and prices remain near record levels reached earlier this year amid rock-bottom mortgage rates and a frenzy for bigger living spaces driven by the COVID-19 pandemic.

Though Canada has seen a rising vaccination rate and an improving economy since then, the strength in the housing market is still far beyond what’s warranted by these developments, with prices further detached from labor incomes, the agency said.

“We’re seeing price acceleration, over-valuation, and it’s increasing the vulnerabilities for Canada,” Bob Dugan, CMHC’s chief economist, said on a conference call with reporters. “Hopefully we don’t see a large fall in house prices.”

On top of the shift in the national outlook, the agency raised its risk assessment of Montreal’s housing market to high from moderate, bringing the number of Canada’s major cities deemed most at risk to six. Vancouver was a notable exception, seeing its risk assessment fall to low from moderate on an increase of homes on the market that’s caused price growth to settle down…read more.