Rapid rebound fuels fears of housing bubble

November 17, 2009

 Below is an article by Garry Marr, Financial Post – published: Monday, November 16, 2009:

Canadian existing home prices are now rising at a pace not seen in 20 years, fueling talk that a bubble may be forming in the market.

The average price of a home sold last month was $341,079, a 20.7% increase from a year ago, the Ottawa-based Canadian Real Estate Association said Monday. Sales also continued to climb with 42,288 units trading hands, a 41% jump from October, 2008.

At the same time that demand continues to surge and interest rates remain at historic lows, supply remains critically low. New listings last month in the country’s 25 largest market were off 16% from a year ago.

Read the full article here.

How much higher?

Derek Holt, senior vice-president of economics at Scotia Capital quoted “what’s happening in the marketplace today a once in a lifetime situation”. He said “record low interest rates, tight supply, a favourable lending environment and government stimulus program have all helped stir the housing pot”.

oct09-copy.jpgWhen a pricing trend line is drawn, today’s home prices will appear to be 25% to 30% higher than where home prices should be. At current price level, real estate as an investment is draining  cash from an investor as rental income is falling far short of supporting mortgage payment, property tax and maintenance/repair costs.

This is not the time to speculate or buy a second home for investment.

Interest rates are not set by Governments

Current ultra-low interest rates may continue for some time. There may be other factors that cause rates to go up dramatically. The danger of another panic liquidation of homes that happened just a year ago could happen again.

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