Is this a housing bubble?
By Kevin Press, BrighterLife.ca
If there has been a silver lining somewhere in Canada’s dark recession clouds, it is the residential real estate market.Contrary to the expectations of almost everyone, home prices have continued to rise this year. Fueled by historically low interest rates and a drop in supply, valuations continue to rise to the point where some are asking an alarming question. Is Canada in the early stages of a housing bubble?
On Monday, the Canadian Real Estate Association upped its sales forecast for 2009 and 2010. The association is predicting 460,200 sales this year, which would be a 6.2% increase over 2008. It had expected flat year-over-year growth. Sales in October rose 41% relative to the same month last year.
The Conference Board of Canada, which has released the fall edition of its Canadian Outlook Economic Forecast, is not warning of a bubble. “We don’t see that as a major issue for Canada,” said Pedro Antunes, director, national and provincial forecast. He and I spoke yesterday.
“There are two areas in Canada that are very conservative; one is banking and the other is residential development,” said Antunes. “We haven’t seen any over-activity in relation to the fundamentals.
“Developers have been very careful. We haven’t seen a lot of new supply coming on-stream. They’ve been concerned about the impact the recession might have on home purchasing. Instead, the consumer has been active. And because of the low supply, we’ve seen prices maybe a little stronger than we might have seen had construction levels been a little bit more robust.”
Construction will pick up as developers see demand continue to strengthen. Builders will also benefit from a favourable new housing price index. That’s a measure of what it costs to construct new homes. The index hasn’t been this low since the first half of 2007. According to The Conference Board of Canada’s forecast: “The index is expected to continue its decline but at a slower pace through the second half of 2009 before starting to grow again in the first quarter of next year.”
As a result, expect increased levels of new home construction which will bring prices down.
The housing market will cool further as mortgage rates begin rising in 2010. The Bank of Canada has committed to maintaining its overnight rate at 0.25% until June of next year. But after that, Antunes said The Conference Board of Canada is predicting “a fairly aggressive increase in rates, where they come back to normal within basically a couple of years … Mortgage rates have come down by two or three percentage points, and that’s what we expect them to come back up as we come out of this cycle.”
Antunes admitted that home prices have risen faster than expected, and so “there’s a possibility there could be a correction in the near term.” But, in his view, Canadians are not looking at a housing bubble.
Canada may not be in the early stages of a housing bubble but there are local markets, especially Toronto and Vancouver, where price stabilization is inevitable as asking price outstrips demand capability.
To put it another way if the typical person for whom the house is built cannot afford it then that person will not buy it but buy something cheaper. This happened in Calgary, is happening in Vancouver and is or will happen in Toronto. Houses in these markets have outpaced earnings increases. This does not constitute a the beginning of a national housing bubble but it does constitute a local cooling of prices or the beginning of the end of the boom. Mind you there are some parts of the country, East Coast and prairies outside of Alberta where the opposite is true and earnings have stayed abreast of prices. These markets are ripe for house price increase before a local correction.
In summary there is no national housing bubble because there is no national housing market. Certainly low mortgage rates affect everybody across the country but low mortgage rates can only stimulate exisiting demand in a consumer market although they might create demand in a speculative market. The deciding factor at the end of the day is demand capability and demand for housing can only be fueled in the consumer market by job stability or redeployment of personal static wealth. Wealth is anything but static since 2008 (which could be a positive driving nervous emigres from the stock market to the bricks and mortar) and jobs are going to be bled to the US’s increasing return an autarkic economy and protective tarriff systems.
After living in Montreal for 2 years and frequently visiting the States I was always impressed at Quebec’s ability to float quite evenly on the housing market. Properties were expensive in Montreal (as they are in any city) but still available to those who worked for them. Rentals were affordable and generally the economy seemed more stable…. Hopefully all this means Canada will never be hit as bad as their neighbours.
Cheers
Forest.
frugalzeitgeist.com
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