Are Hamilton house prices part of a national housing bubble?

Housing prices continue to rise in Hamilton and many cities across the country, but analysts caution that the federal government needs to take action to slow down an overheated housing market.
Hamilton is second in the country for housing price increases in the last year. But analysts warn that Canada's hot housing prices could lead to a downfall. (Samantha Craggs/CBC)

Housing prices continue to rise in Hamilton and in many Canadian cities, but analysts caution that the federal government needs to take action to slow down an overheated market.

The Teranet-National Bank composite house price index for June showed that housing prices rose 0.9 per cent from May and were up 4.4 per cent from last year.

That includes a 7.3-per cent increase in Hamilton housing prices over last year, and 3.1 per cent in the last month.

Only Calgary housing prices increased at a higher rate, with an 8.1-per cent increase. Toronto and Vancouver climbed 6.1 per cent.

But Fitch Ratings says Canada’s real estate market is as much as 20 per cent overpriced. It cautions that the government may need to take more measures to slow down borrowing on homes.

Fitch is the second U.S. financial agency to sound the alarm on Canadian home prices in the past week, with the Morningstar research firm predicting a 30-per cent correction was possible over the next few years.

The year-to-year gain for the Teranet-National Bank index was the lowest in six months, but still more than twice the underlying level of inflation in Canada and above income growth.

Several major markets showed a cooling trend. Prices in Ottawa-Gatineau fell 1.7 per cent compared with a year ago, Quebec City dropped 2.4 per cent and Halifax lost 2.5 per cent.

Whether Canada's home prices are due for a big fall has been a hotly debated topic in Canada for several years, but as yet predictions of a housing bubble about to burst have not materialized.

The majority of analysts, including the Bank of Canada, forecast a soft landing for housing, however, with price increases, sales and starts leveling off or decreasing only moderately. Still analysts such as David Madani of Capital Economics warn the longer the correction is delayed, the steeper the fall will likely be.

Fitch Ratings argues that government efforts to moderate growth by tightening mortgage rules and lending practices have had mixed results, noting that sales and building permits for residential construction have picked up in recent months.

Meanwhile, home prices continue to defy gravity mostly because interest rates are so low.

"We believe high household debt relative to disposable income has made the market more susceptible to market stresses like unemployment or interest rate increases," the agency says in the assessment issued Monday.

"Fitch believes the Canadian government has taken several proactive steps in recent years to mitigate some of the risks to the housing market. However, the long-term impacts remain unclear, and policy-makers may be required to take additional steps over the short term to engineer a soft landing."

Fitch said it was worried because household debt to income has only come down slightly from the 164.1 per cent high reached in third-quarter 2013, and unemployment will likely remain in its current seven per cent range for some time.

Since being named finance minister in March, Joe Oliver has mostly taken a hand-off approach to the housing situation, agreeing with the Bank of Canada that the most likely scenario is a soft-landing.

However, the government has managed to tighten lending at the margins. At the end of May, the Canada Mortgage and Housing Corp. stopped insuring mortgages on second homes and offering insurance on self-employed borrowers unless they have proof of income levels.