Canada's Housing Bubble

Nov 28, 2010 Michael Babad theglobeandmail.com

Housing pricey but no bubble seen

Canada's housing market is moderately overvalued but not a bubble waiting to be burst, BMO Nesbitt Burns says.

“All things considered, the Canadian housing market does not appear to be in a bubble, and is unlikely to suffer a U.S.-style collapse,” economists Earl Sweet and Sal Guatieri said in a research note.

“A key and overriding difference is the quality of loan origination in the past decade, as well as other institutional factors such as mortgage insurance and recourse against defaulters,” they wrote in the report titled “Canadian housing: Pricey, not dicey.”

THe Economist published a report recently that indicated Canada's real estate market is overvalued to the tune of 24 per cent. The magazine used a measure that compares home prices and rent, whereas comparing prices with personal income is a “superior methodology,” Mr. Sweet and Mr. Guatieri said.

Using their method, they found prices peaked, in terms of overvaluation, at 18 per cent late last year. But a 3-per-cent drop in prices so far this year, along with moderate income growth, cut that to “a less worrisome” 11 per cent in the third quarter.

“Though overpriced, the absence of widespread speculation and egregiously loose credit standards suggests the market is not in a bubble,” They wrote. “Instead, Canada’s housing market remains reasonably affordable because of exceptionally low interest rates. Barring a sharp spike in mortgage rates or a relapse into recession, a substantial price correction is unlikely to occur. The greater risk could be that sustained low interest rates might recharge the housing market and inflate a true bubble that ultimately bursts when rates normalize.”

The BMO study comes as Canada’s mortgage market tops $1-trillion for the first time, Globe and Mail real estate reporter Steve Ladurantaye writes today.