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Canada housing overvalued, but cooling seen ahead -agency

OTTAWA, Oct 26 (Reuters) - Canada's housing markets still show evidence of overvaluation, the federal housing agency said on Thursday, but it tempered the warning with a forecast for slower starts, sales and price acceleration in 2018 and 2019.

The Canada Mortgage and Housing Corp said that although the market in Toronto, Canada's largest city, had cooled recently, it remained overvalued. Vancouver shows evidence of overvaluation and accelerating prices, the agency said.

The agency, which is also responsible for insuring the bulk of Canadian mortgages issued by banks and other big lenders, said rising costs for home loans should curb activity over the next two years.

"In 2018 and into 2019, housing starts are projected to decline while house prices should increase over the forecast horizon, but at a slower rate than in the past four years," Chief Economist Bob Dugan said in the report.

Repeated forecasts for a housing slowdown have failed to materialize for several years in a row, but a succession of moves by various levels of governments to cool the market have helped douse demand in Toronto and other cities.

The agency said it expected residential construction to level off by the end of 2019, though not as sharply as it had previously forecast, remaining near the 200,000-unit level.

Sales are forecast to decline slightly in 2018 and 2019 after losing momentum in 2017 on tighter mortgage rules.

Average prices have already fallen from an early 2017 peak of C$536,000 ($417,283) but are expected to regain moderate upward momentum in 2018 and 2019.

Agency head Evan Siddall said in an interview last week that sufficient action had been taken to tighten mortgage standards at federally regulated lenders.

Canada's banking regulator earlier this month unveiled tougher new mortgage rules aimed at safeguarding lenders and borrowers. The regulations, which take effect at the beginning of 2018, are expected to dampen the housing market.

Canadian authorities have introduced a range of measures over the past 18 months intended to cool housing markets, including slapping special taxes on foreign buyers in Toronto and Vancouver and adopting tougher tests on borrowers' ability to meet repayments.

($1 = 1.2845 Canadian dollars) (Reporting by Andrea Hopkins; Editing by Lisa Von Ahn)