Housing bubble talks

December 25, 2009

 Is there a housing bubble in Canada?

The recent surge in property sales, fueled by rock-bottom mortgage rates, is encouraging Canadians to take on levels of debt that they won’t be able to maintain once rates rise.

In an exclusive interview with Canwest News Service and Global National, finance minister was quoted “Canada’s government will puncture any housing bubble“.

“The federal government is ready to clamp down further on mortgage rules if the boom in the Canadian housing market turns into a bubble, says Finance Minister Jim Flaherty”.

MBABC president Joe Santos cautioned Wednesday, “that much of the heat Flaherty is seeing in the market has already been spent and that the finance minister should wait before making any decisions on mortgages”. Read the report here >.

Greater Vancouver housing price chart

With the introduction of mortgages with 35-year (from 25 years) amortization, home buyers are able to afford homes that are 16% higher in values. Coupled with interest rates drop from 5% range to current 3-year fixed rate of 3.55%, a home owner now can afford to buy a home 40% higher in value as compared to 10 years ago.

These 2 factors help to lift home prices to current level as shown on the above chart. There is a huge price gap between current detached home price at around $910,000 and the trend line price around $540,000. The danger of a price collapse and busting of the housing bubble is real.

Danger of higher interest rates on home prices

If the mortgage rates increase from current fixed 3-yr term around 3.55% to 5% or higher, home buyers will be constrained to buy homes 20% lower in value. If market sentiment turns, we may experience a second reversal in home prices.

Rental returns as compared to home prices

From 2001 to end 2009, rental increase was in the range around 25% to 30%. On the other hand, home prices more than doubled and gained almost 135% in value.  A big jump in interest rates from current 3.0% level to higher rates of 5% to 6%, will have a major impact on many home owners.

When renting is an option, home buyers may want to wait and see how the economy and interest rates play out in the next year or two.

Homes currently listed for sale in Vancouver and Richmond can be viewed here.

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