Should Canada fear housing bubble trouble?
What the experts are saying
The most recent MLS data show that the average resale home in Canada sold for $337,410 in December — up 19 per cent from a year earlier. Sales were up a stunning 72 per cent.
Bidding wars are in full swing in Toronto and Vancouver, with anecdotal reports of some properties drawing 20 offers or more.
Economists agree that double-digit increases in housing prices in the absence of significant income gains are unsustainable in the long run. Housing would just become too unaffordable.
They also agree the current environment of record low mortgage rates is driving the current buying frenzy. A closed variable-rate mortgage goes for just 2.25 per cent at the major banks — even less from some smaller lenders — and a five-year fixed mortgage can be had for less than four per cent.
|Canadian debt: By the numbers|
|Household debt-to-income ratio (Q2/09): 142%|
|Total residential mortgage debt (11/09): $956 billion|
|Total household credit (as of Nov. 2009): $1.4 trillion|
|Percentage of mortgages in arrears (11/09): 0.44%|
|Sources: Bank of Canada, Canadian Bankers Assn.|
So the question then becomes how hard the landing will be once mortgage rates begin to rise. And everyone agrees they will rise. The only point of contention is when and how fast.
You only have to look at the recent collapse south of the border to see just how brutal a housing bubble burst can be. A huge wave of U.S. foreclosures played a key role in the global financial meltdown and the average American home price plunged by a third from 2007 to 2009 (Canadian prices fell only nine per cent from peak to trough and have since rebounded).
Could the same thing happen here?
In Canada, many economists, mortgage professionals, housing industry watchers and central bank advisers have been busy wading into the debate over whether we are about to echo the American collapse in prices.
Here's a sampling of some recent research, observations and predictions. Hyperlinks are included for those who want to read further:
The Bank of Canada:
"Generally, when there is a rapid rise in asset prices, including house prices, one should always ask whether they have increased too far, too fast.
"In the Bank of Canada's view, it is premature to talk about a bubble in Canadian housing markets. Recent house price increases do not appear to be out of line with the underlying supply/demand fundamentals. Moreover, with housing starts below long-term demographic requirements, inventories are still declining. It is likely, though, that a significant part of the surge in housing sector activity is associated with temporary factors — notably the historically low borrowing costs, as well as pent-up and pulled-forward demand — which cannot continue to drive increases in house prices and activity. Thus, we see the housing market as requiring vigilance, but not alarm."
— From Canada's Housing Sector in Recession and Recovery: Beyond Bricks and Mortar, a speech delivered Jan. 11, 2010, to the Edmonton CFA Society by David Wolf, adviser on behalf of Timothy Lane, deputy governor of the Bank of Canada.
Canadian Association of Accredited Mortgage Professionals:
"The bottom line from the simulations [see assumptions below] is that even though mortgage payments will probably rise for most borrowers, the increases in incomes (even with the cautious assumption that incomes will increase by 2.5 per cent per year) will more than offset the increased mortgage payments."
— From Revisiting the Canadian Mortgage Market , a January 2010 report by Will Dunning, chief economist, CAAMP.
Notes for above quote: CAAMP ran a simulation of rising interest rates using its own mortgage database. It assumed rates would rise to 5.25 per cent for both fixed rate and variable rate mortgages. For mortgages with current rates above that, the rates were assumed to be unchanged in the future. The CAAMP study assumed that for variable mortgages, the 5.25 per cent interest rate would take effect in two years; for fixed-rate mortgages, the 5.25 per cent rate would be deemed to take effect at the scheduled end of the mortgage's term.
Canadian Real Estate Association:
"CREA's latest statistics will no doubt spark further bubble talk amongst the usual suspects. Cooler heads recognize that many of the recent gains reflect temporary factors that could fade by summer.
"The extraordinary decline in activity one year ago and subsequent rebound, particularly for higher-priced real estate, is stretching current year-over-year comparisons. By the second half of 2010, price gains are likely to shrink significantly, since a year will have elapsed since the decline and rebound. Further expected increases in supply will also take some steam out of the market."
— Comments from CREA chief economist Gregory Klump, quoted in a CREA news release, Jan. 15, 2010.
David Rosenberg, chief strategist at Gluskin Sheff:
"In answer to the question as to whether prices are in a bubble, all we will say is that when we ran some charts showing Canadian home prices normalized by personal income or by residential rent, what we found is that housing values are anywhere between 15 per cent and 35 per cent above levels we would label as being consistent with the fundamentals. If being 15 per cent to 35 per cent overvalued isn't a bubble, then it's the next closest thing. We are talking about two to three standard deviation events here in terms of the parabolic move in Canadian home prices from their lows. So, if it walks like a duck …"
— From Gluskin Sheff chief strategist David Rosenberg, in a note to clients, Dec. 10, 2009.
Scotia Capital Economics
"We expect housing demand will remain strong through the key spring sales season as buyers attempt to pre-empt the inevitable rise in interest rates, and improving labour markets bolster confidence. Reduced affordability — through a combination of higher home prices and borrowing costs — will eventually cool demand, though probably not until much later in 2010."
— By Adrienne Warren, Scotia Capital economist, in Global Real Estate Trends, published Jan. 11, 2010
"One of the challenges of the housing market's resurgence amid still-poor labour market conditions is that mortgage obligations are becoming more difficult to meet for a growing number of Canadian households. The Canadian Bankers Association reports a rising proportion of mortgages in arrears. This is especially the case in Alberta where the earlier housing boom has saddled many households with hefty mortgages that are now harder to service in the face of surging unemployment in the province. Mortgages in arrears are likely to continue climbing across Canada until the economic recovery is well established and net job creation is sustained next year."
— From RBC Economics quarterly Housing Trends and Affordability report, November 2009
"From their trough [in 2007], the most sustainable path for Canadian home prices would have been a gradual and modest uptrend aligned with nominal income growth. But now that home values are already past their previous peak in such short order, we estimate that the typical home remains overvalued by 12 per cent at the national level. Unfortunately, sheer momentum suggests that this overvaluation is likely to increase over the course of the next few quarters, peaking at 13 to15 per cent in [the first half of 2010]."
— From TD Economics' December 2009 Resale Housing Outlook.
Financial author Garth Turner
"I'd be surprised if there isn't a housing rush, led by cashless, hormonal, frantic, pre-approved newbies, desperate to beat the HST and the fabled rate hikes of autumn. Fanning the flames will be every local real estate board, gorged as they are on the MLS fees which have gushed in (let's save this for another post).
"Once again, the actions of the herd — driving a market to orgiastic crescendos of desire — will be the truest barometer of what comes next. People so desperate to get in that price hardly matters. Bre-X. Nortel. Bullion. Pet.com. It doesn't take a genius to know what comes next."
— Posted by Garth Turner in his blog, The Greater Fool, Feb. 5, 2010.
Real Estate Prices Across Canada
This map includes the latest real estate statistics from across the country, including average prices of resale homes and change in price of new homes.