Should Canada fear housing bubble trouble?
Should Canadians fear housing bubble trouble? An article posted on CBC shares the most recent MLS data.
Article: 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.
Source: CBC News