Canada’s national housing agency has moved the Toronto region housing market out of the high-risk red zone into the moderate yellow area for the first time since 2015.

There are still signs that the area’s market is vulnerable to price acceleration and overheating, but overvaluation — where home prices exceed income levels by an excessive amount — eased from moderate to low in the first three quarters of the year, said Canada Mortgage and Housing Corp. (CMHC), which released its fourth-quarter Housing Market Assessment on Thursday.

“From an overall perspective there’s still a moderate degree of vulnerability but, of course with the overvaluation easing, that has led to our assessment coming in at moderate,” said Dana Senagama, manager of market analysis for Ontario.

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But while the market as a whole is at less risk, some housing types, such as condominiums, are still vulnerable to overheating and price acceleration, she added.

“While the activity has softened in the low-rise category, we are seeing heightened activity in the more price-friendly point for first-time buyers in condos and towns,” said Senagama.

As overvaluation eased, home-buying activity has picked up since the first quarter of this year. The average home price increased by 0.8 per cent year over year in the second quarter of 2019 on an inflation-adjusted basis. Disposable income levels also grew by 0.5 per cent.

The region’s first-time home-buying population, people aged 25 to 34, grew by 3.7 per cent compared to 1.9 per cent nationally.

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“Supply continues to be the defining factor in the Toronto housing market — or rather the lack of supply — both in home ownership but also in rental,” said Senagama.

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There has been a tight supply in low-rise housing since CMHC started doing the Housing Market Assessment in the third quarter of 2015, but as demand for condos grows, it’s increasingly an issue in that segment too, she said.

CMHC’s Housing Market Assessment uses four factors: overheating, price acceleration, overvaluation and overbuilding to assess the housing picture nationally and in 15 major metropolitan areas.

The latest report gives the national housing market a moderate rating for the third consecutive quarter, following 10 quarters where it was rated at a high degree of vulnerability.

Hamilton also saw its vulnerability rating drop from high to moderate, thanks to lower overvaluation.

“Overheating and price acceleration are still signaled due to large market imbalances that developed at the beginning of the latest three-year period. However, an unwinding of those imbalances has occurred since then,” said the CMHC report.

Overvaluation has been decreasing overall in Canada and in key markets such as Vancouver and Victoria, as well as Toronto, said CMHC chief economist Bob Dugan.

Although the Victoria market is no longer considered to be overheated, it remains the only Canadian market in the red zone, due to price acceleration and overvaluation. However, those conditions are easing, Dugan said.

Vancouver remains moderately vulnerable with continuing overvaluation.