What overvaluation means for Edmonton

Canada Mortgage and Housing Corp. (CMHC) has been eyeballing the real estate market in Edmonton, and have found moderate evidence that housing is overvaluated in this city.

Spell-check will flag overvaluated as a non-word, a combination of over and evaluated, but the message is pretty clear.

In the last quarter of 2015 CMHC observed that home prices are dropping but not in proportion or not supported by other economic drivers in Edmonton, such as income and jobs, mortgage rates and growth of the population.  This means, despite what’s happening in Alberta the growth of house prices has not kept in step. The rate of decline is not the same rate of decline as other drivers which could be problematic.

When CHMC does as assessment of a market, it considers four basic factors when calculating risk.  Take into consideration are the rate of new builds, trumped up demand, rising home prices and that magic word, overvaluation.

However, others claim that falling home prices are in keeping with economic conditions in Edmonton and that the housing market is simply being pushed into balance. Home prices have fallen five months in a row when observing seasonally adjusted data.  The market is heading in the right direction, with lower sales figures and more inventory.

The Realtor’s Association in Edmonton in predicting market activity for 2016, believes total sales will drop by 2.3% over 2015.    That drop would take total sales to under 17,000 this year.  Further to this, the association predicts that detached homes and condominiums will drop 2.6% year over year, based on a 12-month average.  Last year the average price for a detached home averaged over a 12-month period came in at $437,569 and condos at $252,954.

The Realtor’s Association has agreed with CMHC in regards to overbuilding in Edmonton, particularly with multi-family developments.  The vacancy rate compared to the number of units in multi-family buildings could be a concern going forward.

CMHC has looked at 15 markets across the country and estimates that housing in eight metropolitan areas is overvaluated by as much as 35% with overbuilding observed in seven.

Edmonton’s overvaluated potential is more dire that what is being experienced in Calgary.  While our market is deemed to be moderate, Calgary has been labeled “strong”, with a huge overbuilding potential and more critical vacancy rate that what is being experienced in Edmonton.

What does this mean?

If the figure of 30% to 35% is correct, we could be setting ourselves up for the same type of panic that swept through the U.S. when the bubble burst in 2006.  People owned more for their homes that what they were worth, resulting in defaulted mortgages and foreclosures.

Who will be affected?

The people least affected by this potential are young buyers, debt-free, who haven’t gotten into the market yet.  If prices crash, Millennials between 18 and 34 can finally get into the market.

Those people who have owned their homes for a long time and have significant equity in their home will also weather any possible market correction. Unless they have a large home equity line of credit or have co-signed mortgages for kids.

If housing prices drop the predicted 50% that some gloomy experts have forecast, those who have bought homes recently with 5% or even 20% down payments will be left scrambling, particularly when it comes time to renew their mortgage. Especially those with debt and no savings or investments.