Canada's Housing Bubble

Jun 29, 2011 STEPHEN GORDON theglobeandmail.com

Bank of Canada Governor Mark Carney’s recent speech entitled ‘Housing in Canada’ does not contain the word ‘bubble’. Indeed, his talk was very careful not to venture an opinion on the question of whether or not the Canadian housing market -- and in particular, the Vancouver housing market -- is experiencing a bubble. Nor should he have: asset bubbles are almost impossible to identify in real time; price increases aren’t always due to irrational behaviour. And when interest rates are very low, those increases can be very sharp indeed.

Asset prices reflect the present value of future payoffs, and so they depend on both expectations of those payoffs as well as the interest rate used to discount them. Everything else being equal, higher expected future payoffs produce higher asset prices, and higher interest rates generate lower prices.

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