Ontario’s residential real estate market is overvalued by more than 20%, according to Fitch Ratings, and it’s expecting prices to fall.
The credit rating agency said today that it estimates that the Ontario market is currently overvalued by 21% in real terms, based on long term macroeconomic drivers.
Prices have already dropped 1.6% from the September 2012 peak, based on Teranet’s House Price Index, it notes. And, as more supply enters the market, and sales continue to clear, it expects to see “extended price declines” in the province.
Fitch reports that the number of multiple-unit developments (including condominiums) in Ontario has reached a 40-year high. And, while there are 10% fewer units than the record highs of the condo boom in the early 1970s, Fitch says that with more than 73,000 units currently under construction, “We are concerned that this level of construction will contribute to oversupply in what is already a softening market.”
First quarter sales volumes in Ontario, and specifically the Greater Toronto area, are down 14% from a year ago, it says, noting that, “declining transaction volume can be a leading indicator of price declines, since many sellers will attempt to hold out for a better offer rather than accept a lower price in a slowing market. This behavior serves to decrease sales volume and generate downward-sticky price levels.”
Fitch also notes that new-home builders face an uncertain environment due to the combination of negative factors, including high household leverage, tightening mortgage credit, increased supply in the market, and lower sales volumes.