Canadian home prices remain approximately 20 per cent overvalued, according to Fitch Ratings’ (Fitch) sustainable home price model. In a July 14 press release, the global ratings agency cites the Canadian Real Estate Association’s report that home prices rose 7.1 per cent, year over year, in May. Historically low interest rates and a lack of supply in major cities have propped up affordability and drive demand, the release says.

The Canadian government has taken several measures to protect against risks to the housing market, including tightening guidelines for loans insured by the Canadian Mortgage and Housing Corporation and pulling back on the amount of low-ratio portfolio insurance offered to lenders. Fitch believes these steps will mitigate some risk over the long term. However, policy makers may need to offer more immediate solutions for the short term.

Looking forward, Fitch believes that high household debt-to-income ratios, unemployment levels and rising interest rates may place increased pressure on the housing market.