Bank of Canada dismisses talk of housing bubble

I have had quite a few people ask me in the last little while, because it has been a strong Seller`s market, whether we are experiencing a housing bubble and my reponse has been based on the affordability index in the Burlington/Hamilton area that I dont think so but most of what we are seeing is a shortage of inventory because new home starts were way down in 2009 and interest rates were and are at very low levels. The following is a well written article released by the Canadian Press on that topic.

January 14, 2010

Bank of Canada dismisses talk of housing bubble

Fundamentals, not speculation driving market, experts say

OTTAWA

A hot housing market is part of the natural flow of economic recovery, according to the Bank of Canada and economists working to deflate theories about a new housing bubble that could drive the economy back into recession.

The Bank of Canada indicated it was premature to be talking about a housing bubble in Canada in a speech Monday by bank official David Wolf. His remarks came after months of highlighting the danger of Canadians getting in over their heads in purchasing homes.

“Recent house price increases do not appear to be out of line with the underlying supply/demand fundamentals,” Wolf said. “We see the housing market requiring vigilance, not alarm.”

Wolf said the bank considers the current market to be a phenomenon based on temporary factors, such as pent-up demand from the recession, and low mortgage rates.

Moreover, he noted that with starts below long-term demographic requirements, the number of houses on the market is still declining.

The Canadian Real Estate Association reports housing prices increased about 4.4 per cent over the first 11 months of 2009, and predicts a further increase of 4.7 per cent in 2010.

The association’s chief economist, Gregory Klump, said the year-over-year increase has been “turbocharged” by a combination of today’s strong market and the weak year-ago market, which skews average prices.

He added that the current increase is part of natural real estate cycle.

“One would expect that when the worst of a recession is behind us and we’ve got emergency low interest rates, that would draw buyers back to the market,” he said.

Recovery in Canada’s housing market, where average home prices were up 11 per cent from July to September over the year-ago same period, leads developed countries, according to Scotia Economics’ Global Real Estate Trends report.

Adrienne Warren, senior economist at Scotia Economics, said Canadian homes are about 10 to 15 per cent overvalued, meaning there are risks if the economic revival does not play out as expected.

But she added that a bubble is unlikely because activity is based on fundamentals, not speculation.

“Because the housing market is interest rate sensitive…(it is) really the first area of the economy to revive. Once interest rates begin to move higher…then you’ll start to see the housing market being one of the first areas to begin to cool off,” Warren said.

“(But) I don’t think the risk of a sudden, widespread shock and rising default rates is likely,” she said.

Bank of Canada governor Mark Carney has warned for months that Canadians are amassing too much consumer and mortgage debt and that could be a problem for the broader economic recovery if rates rise and debt payments begin to increase for millions of Canadian households. However, Monday’s comments suggest the central bank won’t push rates higher just to cool the housing market.

Finance Minister Jim Flaherty has also openly discussed policy measures to cool the housing market, including raising the minimum down payment requirement above five per cent, or reducing the maximum mortgage amortizations.

Monday’s speech came hours after Canada Mortgage and Housing Corp. released a report indicating the annual rate of housing starts reached 174,500 units in December, up nearly 10,000 from November.

The organization said the improvement in housing starts was broad-based, with solid increases in both single and multiple starts to end the year.

Klump said the rise in new supply in the market as well as the increase in the resale market will help the balance between supply and demand, adding that as 2010 progresses price increases will shrink to the rate of inflation.

Canadian Press