Toronto house prices to slip in 2015

TD Bank report estimates Toronto and Vancouver real estate markets are 10 to 15 per cent overvalued, compared to 10 per cent for rest of country, and due for a market correction.

The first of the big Canadian banks has weighed in with a warning that Toronto’s housing market is overvalued by 10 to 15 per cent.

So is Vancouver’s, says TD Economics in a report released yesterday, noting that both cities have been seeing “frothier conditions” than the rest of the country, where house prices remain at least 10 per cent overvalued, largely because of low interest rates which have been allowing rampant bidding wars.

“Toronto and Vancouver make up 40 per cent of the Canadian housing market, so that’s what’s really driving the overvaluation measure,” said TD economist Diana Petramala in an interview.

The coming increase in interest rates will cause a "negative economic shock" could will send resale home prices tumbling by 25 per cent, Petramala notes. But it’s far more likely there will be a “gradual unwinding of excesses” in the Canadian market as interest rates slowly rise, along with incomes, over the next few years.

Toronto home prices jumped 6.8 per cent in 2012 and 5.4 per cent in 2013, they are expected to rise just 2.7 per cent this year and then slip by 1.2 per cent in 2015, when interest rates are expected to start climbing, the report forecasts.