Is Canada’s housing market a bubble set to burst?

February 10, 2010

 Below is a Toronto Sun article by STEFANIA MORETTI, QMI Agency published on 10th February, 2010.

Boom, backlog or bubble? There’s been much speculation about Canada’s housing market and whether it’s entering ‘bubble’ territory. That’s because bubbles inevitably pop.

Canada’s housing market staged a strong recovery from the financial meltdown, fueled by low interest rates, to return to record levels of activity in late 2009. That helped pull the overall economy out of recession.

The steep rise in prices and activity at a time when other areas of the economy, such as job creation, remain sluggish have raised fears of a bubble.

Price tags on homes in Canada jumped 19% in December from a year earlier and housing prices are on pace to climb another 5.4% to a new all-time record this year, according to the latest figures from the Canadian Real Estate Association.Affordability could soon be out of reach for many as the price of the average home in Canada is on track to reach $337,500 by year’s end before easing again in 2011.

But steep prices aren’t the only factor in a bubble-forming. So how can we spot the threat? According to Gilles Duranton, an economics professor specializing real estate markets at the University of Toronto, the answer is simple: we can’t.

“Nobody knows. And those who pretend to know should know better,” he told QMI in an interview.

Like any other investment asset, house prices are a reflection of what the market is willing to pay at a given time. They’re based on predictions of what a particular property could be worth in the future, Duranton said. In most cases, prices are somewhat justifiable, therefore price tags alone cannot signal the onset of a bubble.

However, there is one aspect of today’s market that this long-time real estate watcher has rarely seen before in Canada.

“Individual markets are all on the way up at the moment,” Duranton said pointing to Canada’s major metropolitan areas including Vancouver, Calgary, Toronto and Montreal.

“It’s quite unusual historically and certainly not the norm,” he said.

A backlog of activity could also be skewing the latest real estate snapshots as buyers and sellers re-enter the market after putting off decisions during the recession.

“A downward trend in national sales activity, combined with an increase in listings will result in a more balanced market,” CREA Chief Economist Gregory Klump said earlier this week.

The Bank of Canada has downplayed talks of a bubble thus far, but has said it’s watching home prices closely. The central bank has said it will hold its lending rate at historic lows of 0.25% until at least June.

Affordable rates and attractive mortgages have helped lure buyers back in the market in recent months.

There’s even been talk that federal Finance Minister Jim Flaherty could further tighten rules on mortgages to protect homeowners from getting in over their heads with debt once interest rates begin to climb.

The government has already reduced the maximum allowable amortization period from 40 years down to 35 and could take steps to increase minimum down payments next.

The head of ING Direct Canada and economists at Scotia Capital warned Tuesday that dramatic rules changes by Ottawa at this stage in the game could swing the housing market in the opposite direction too quickly.

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