Ontario Real Estate Is The Most Overvalued In Canada, Slow Growth Expected: Moody’s
Exuberant Canadian real estate buyers sent home prices soaring during the pandemic. Now some provinces have severely overvalued housing markets, according to Moody’s. The credit rating giant’s provincial models show severe overvaluations in provinces like Ontario. Analysts from the firm forecast this will result in slow price growth over the next few years. Not all markets are overvalued though. Markets like Alberta and BC (!) are actually considered undervalued, with the former expected to see a boom.
Canadian Cities Are Over 22% Overvalued
Canadian home prices are generally overpriced across the country, especially in cities. The agency’s models show the urban composite is 22.6% overvalued as of Q2 2021. They still expect them to rise another 2.6% next year, with growth tempering even lower the year after. The average growth over the next two years is forecast to be an annual average of 1.38% over the next two years.
Canadian Residential Real Estate Valuation By Province
The percent deviation from estimated valuation for Canadian housing markets by province. Positive numbers mean overvalued and negative numbers mean undervalued.
-20-100102030CA UrbanONNSQCNBBCQCMBNLSKABPercent
| Region | Percent |
|---|---|
| CA Urban | 22.6 |
| ON | 16.9 |
| NS | 15.3 |
| QC | 14.3 |
| NB | -1.8 |
| BC | -2.9 |
| QC | -3.6 |
| MB | -3.9 |
| NL | -10.3 |
| SK | -16 |
| AB | -19.8 |
Source: Moody’s Analytics; RPS Brookfield; Better Dwelling.
Ontario Is The Most Overvalued Real Estate Market In Canada
Ontario real estate is the most overpriced in the country, surprising no one in the province. They estimate the province’s real estate market is 22.6% overvalued in Q2 2021. They see prices rising 1.3% next year and showing an average annual growth of 0.3% over the next two years. Elevated inflation can make this a significant correction over that period.
BC Real Estate Is Undervalued, Just Not In Vancouver
BC real estate is pricey but Moody’s thinks it might actually be undervalued. The province’s markets were 3.0% undervalued in Q2 2021. They only see 2.0% growth next year and an average of 1.8% annual growth over the next two years.
Careful not to conflate “BC is undervalued” with “Vancouver is undervalued.” The agency estimates the latter is 23.0% overvalued as of the same quarter. This is a significant gap between the price of a typical home in the province.
Canadian Residential Real Estate Forecast By Province
The forecast change in price next year for Canadian housing markets by province and the forecast avg. annual growth for the next two years.
2022Avg 2022-2023-7.5-5.0-2.50.02.55.07.510.0ABSKNLNBMBCA UrbanQCBCONNSQCPercent
| Region | 2022 | Avg 2022-2023 |
|---|---|---|
| AB | 7.8 | 9.3 |
| SK | 7.2 | 8.2 |
| NL | 6.2 | 6.3 |
| NB | 5.4 | 3.1 |
| MB | 2.7 | 3.7 |
| CA Urban | 2.6 | 1.4 |
| QC | 2.4 | 3 |
| BC | 2 | 1.8 |
| ON | 1.3 | -0.3 |
| NS | 0.9 | -2.9 |
| QC | -4 | -5.4 |
Source: Moody’s Analytics; RPS Brookfield; Better Dwelling.
Nova Scotia And Quebec Real Estate Are Significantly Overvalued
After Ontario, the two most overvalued markets are Nova Scotia (15.3%) and Quebec (14.3%). Nova Scotia is forecast to rise 0.9% next year and drop an annual average of 3.0% over the next two years.
Quebec is expected to see prices rise 2.4% next year, with average annual growth reaching 3.0% over the next two years. Being overvalued doesn’t necessarily mean prices will fall, as Quebec demonstrates.
Alberta Real Estate Is The Most Undervalued And Forecast To Lead In Growth
Not every real estate market in the country is overvalued. In fact, Alberta real estate is the most undervalued market in Canada. The province’s residential market is estimated to be 19.8% undervalued in Q2 2021. That isn’t forecast to last for long though.
Alberta home prices are forecast to lead the country in price growth over the next couple of years. The agency expects home prices to rise 7.8% next year. Over the next two years, they’re forecasting an average annual growth rate of 9.3%. The province has been underperforming for quite some time. However, more forecasts and data points appear to see it leading growth.
Generally speaking, the firm doesn’t expect a sharp crash in a normal scenario. Not in their base-case forecast anyway, which is what would happen without any hiccups. They see overvalued housing markets seeing slow growth or mild declines.
Though no asset market ever sees prices crash when people think it’s possible. When people are aware of the risk, they can move to mitigate it and lower exposure. It’s only when people see no risk that they become overexposed and amplify shocks.