Canada's Housing Bubble

Aug 4, 2011 Ken Gray ottawacitizen.com

Bank of Canada governor Mark Carney is about to end the condo and housing boom in Ottawa.

Carney has signalled he is looking at raising interest rates in the near future. That means loan costs of builders to construct the poorly intensified condos in old downtown areas are likely to rise and mortgages will become much more expensive, discouraging buying.

Carney wants to curb inflation which has been running above the Bank of Canada target of three per cent. In raising rates, the problem is that foreign investors will flock to the dollar because of the good, safe fixed interest-rate returns plus a rising loonie bonus. That, in turn, causes yet more export trouble for the already troubled Ontario manufacturing sector with the expensive dollar.

But failing to raise rates is very risky. Individuals are accumulating outrageous levels of debt, much of it through buying too much house. When rates go up, and they will sooner or later, a number of Canadians will lose their homes, just as happened in the United States because they are carrying to large a mortgage. And when foreclosures start to occur, they rapidly collapse the housing market because buyers just wait for that big expensive home to be sold in a scratch-and-dent sale. The U.S. housing market still hasn’t recovered from the Debt Crisis of 2007-08. What makes Canada so special that it can avoid the same thing?

Look at local house prices. Year over year house prices in 2011 have increased 53 per cent in Old Ottawa South, 39 per cent in parts of the Glebe, and 28 per cent in McKellar Park. Ottawa’s more attractive neighbourhoods have risen in price from the aforementioned 53 per cent to 16 per cent. Those are bubble-like increases and are unsustainable. They are propped up by unrealistic interest rates used to prop up a recession economy. The economy isn’t great, but it’s not in a recession anymore.

Furthermore at present, Ottawa is building a huge supply of condos on the Westboro convent site among others. A single project, the giant Metropole, killed the old west end condo market for years, flooding it with supply.

So be assured if the unrealistic Katherine Hobbs, her development friends and their buddies in the city planning department want to build over the Transitway in the old west end, in addition to killing the re-election chances of Hobbs and costing Mayor Jim Watson a huge number of votes in areas zoned residential, such a pie-in-the-sky project is likely to be the biggest of white elephants as Canada returns to normal interest rates.