January 21, 2014 / 2:01 PM / 4 years ago

RPT-Fitch: North American Home Price Growth to Slow in 2014

Jan 21 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings expects house prices to increase modestly in the US and remain broadly flat in Canada in 2014. Despite concerns about regional overvaluation in both countries, a sharp drop in prices is unlikely.

Fitch believes most of the US will see continued home price growth reflecting market momentum, the effects of inflation, the improving economy, and a return of buyers attracted by signs of stabilization. However, gains are expected to slow compared to prior years due to rising mortgage rates and more inventory becoming available. Mortgage volumes are expected to decline as rising rates further curtail refinancing.

Fitch remains concerned about regional overvaluation. According to our Sustainable Home Price model (SHP), national prices are now about 15% overvalued in real terms. This risk is most pronounced in markets that have seen very high home price growth in recent years that has outpaced improvements in local housing and economic fundamentals. Prices look increasingly overvalued in California when compared with fundamental demand drivers. For example, San Francisco price-to-rent and price-to-income ratios have increased by nearly 25% since the beginning of 2012, and are approaching all-time highs.

While Canadian prices may fall this year, Fitch believes any decline would be slight due to the country’s strong macro-economic trends and cautious lending policies driven by government measures, which are expected to slow lending in 2014. However, affordability in Canada is already very stretched, despite record low interest rates, with our SHP model showing national prices approximately 20% overvalued in real terms. We expect the central bank to maintain rates at current levels for most of 2014 but increase them towards the end of the year, potentially putting additional stress on the market.

Fitch’s Global Housing and Mortgage Outlook includes forecasts

For all the countries, the outlook for the mortgage and housing markets has either improved or remained similar to 12 months ago.

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