Overvaluation concerns sounded once again

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Fitch ratings has released an optimistic report about the Canadian economy; though it’s still holding up a red flag on the housing market.

Still, Fitch estimates residential property prices are 20% overvalued and that market is set for only a soft landing, as long as the government remains prudent in its approach to addressing economic vulnerabilities.

The agency gave Canada a AAA rating, say it has a “well-diversified and high income economy.”

Fitch argues, however, that high levels of household debt – which sit at 165% of disposable income -- and certain real estate areas deemed overvalued remain two of its chief concerns.

CMHC is expected to reduce its influence on the market, which should also help to offset further risk to the economy – correction or no correction.

“Only a severe economic shock resulting in higher interest rates and much higher unemployment could trigger direct contingent liabilities for the sovereign from the financial sector,” Fitch said. “The state-owned Canada Mortgage and Housing Corporation (CMHC), a Crown Corporation, insures mortgages worth around 27% of GDP (and falling) and has its own capital buffers.”

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