Record homebuilding in Ontario represents a large forthcoming supply of new housing that could thwart further gains in prices, warns Fitch Ratings.
In a new report, the rating agency observes that “Beneath the unprecedented boom in the Ontario housing market is a large overhang of pending supply” that, it says, could threaten continued home price growth in the province.
Fitch reports that more than 80,000 new multi-family units are currently under construction in Ontario, primarily in Toronto. “This is a record high and nearly 50% more than four years ago when the condominium construction boom began,” it says.
With all of this building activity, Fitch notes that completions are lagging behind housing starts. Yet, when all of this new construction is finally complete, it could impact prices, the report suggests. “With price levels relatively flat over the last six months, the significant boost to supply implied by this construction overhang could present a problem for continued price growth, with the market potentially becoming oversaturated,” it says.
Already, Fitch views Ontario home prices as approximately 25% overvalued, it says, based on the long-term relationship between home prices and fundamental economic factors such as income, unemployment, and mortgage rates. Indeed, it says that throughout Canada it sees housing prices as overvalued. That said, it also believes that prices are unlikely to fall. “This is due to a number of positive factors, including limited risk in outstanding mortgage products,” it says.
“Nonetheless, elevated price risk poses concerns, especially with a significant amount of inventory poised to hit the market,” it warns. “As a large number of units come on line, prices may soften, which could reverberate throughout the Canadian economy. Lower prices would reduce the incentives to build further units, which could hit employment in the construction sector that has been buoyed by continuing price growth. This in turn could lead to more significant downside exposure.”