Report Warns of 'Problematic Conditions' in Canada's Property Sector

Evidence continues to point to "problematic conditions" in Canada's real-estate market, with house-price gains in Toronto and the surrounding regions rising at a pace that can't be justified by economic fundamentals, the country's housing agency said Wednesday.

Canada Mortgage and Housing Corp. said its review of first-quarter real-estate data suggests "strong evidence of problematic conditions," even though there has been a weakening of house-price gains.

The housing agency said four markets it tracked showed signs of overvaluation, led by Toronto -- Canada's largest city -- and nearby Hamilton, Ontario. Vancouver, British Columbia, and Victoria, British Columbia, were also on the list. However, the agency said that compared with its previous assessment last quarter, evidence of overvaluation at the national level has been downgraded from strong to moderate, and is now present in six urban centers instead of eight.

The agency's quarterly report comes roughly a week after officials in the province of Ontario introduced measures designed to curb housing exuberance in the greater Toronto region, highlighted by a 15% surtax on foreign buyers.

Ontario, the country's most populous province, said the policies were required to stabilize a frothy real-estate market and rein in speculators. Prominent economists have warned Toronto housing has entered bubble territory, with house prices rising nearly 30% in March from a year earlier.

The housing agency said the continued rise in house prices "could not be explained by fundamental economic drivers, such as income and population growth -- and therefore strong evidence of overvaluation was detected."

Bob Dugan, chief economist at CMHC, said this report marks the eighth straight time the agency has issued warning signs about the Toronto market, and conditions in the city suggest speculative demand might be a factor in price gains. Mr. Dugan said it was premature to say what impact the Ontario measures might have.

This is similar to what Bank of Canada Gov. Stephen Poloz told lawmakers early this month, when he warned house-price gains in Toronto are "divorced from any fundamentals that we can identify." He added speculators were playing a significant role in pushing up prices on the margin.

The housing agency said local differences continue to divide the country when it comes to real estate. Centers in eastern Canada are showing weak evidence of overvaluation, while regions in southern Ontario and western Canada are showing moderate to strong evidence of overvaluation.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

April 26, 2017 14:31 ET (18:31 GMT)