Despite the fact that it believes house prices in Canada are about 20% overvalued, Fitch Ratings says that it expects prices to stay flat or decline slightly in the year ahead.
In a new report looking at the global housing market, the rating agency observes that, “With prices having grown significantly faster than income and GDP over the last decade, affordability in Canada is very stretched despite record-low interest rates.”
Yet, Fitch says that it expects affordability to “remain stretched but steady in 2014, with a risk that interest rates will rise and place an additional stress on the market around the end of the year.”
The report notes that home prices have risen steadily for more than a decade, and that potential overvaluation in the market is becoming a growing concern. Fitch estimates that national prices are approximately 20% overvalued in real terms. And yet, it finds that the housing market “remains strong”.
“Because of this strength, home prices are expected to remain flat or decline modestly in 2014 despite the current overvaluation,” it says in the report. Also, mortgage rates are expected to remain stable in the year ahead, it notes, as the central bank is expected to maintain rates at current levels through 2014.
Fitch says lending volumes in Canada “may fall slightly due to government measures to moderate the housing market.” It also notes that delinquencies may rise modestly in 2014, but it expects them to remain at low levels. “We believe arrears will not increase much as the market does not feature particularly risky mortgage products,” it says.
Fitch also notes that it expects household debt ratios to stabilize as home price growth slows, or reverses, in 2014.