Canada's Housing Bubble

Jan 23, 2010 William Hanley Financial Post

House prices remain hot, hot, hot back in ice-cold Canada, with talk of a bubble bubbling up among some economists and real estate watchers. But there's no talk of a bubble here in wondrously warm Hawaii, where prices continue to cool off on a year-over-year basis.

The isles' and America's housing slump is another indication -- besides the weak jobs market -- that the U.S. economic recovery will be Ushaped and not a big V for a stunning victory over the Great Recession.

Despite the first-time homebuyers tax credit, which has been extended to April, record low mortgage rates and low, low prices, U.S. residential real estate remains in a funk. The median U.S. house price rose almost 100% from 1999 to 2006. About half of that gain has now been taken back and the news out of the sector continues to disappoint.

This week, the National Association of Home Builders reported that its housing market index unexpectedly slipped a notch in January to 15, raising serious questions about the sustain-ability of the housing recovery. Even though mortgage rates remain attractive and the first-time tax credit is still in place, jobs are scarce and credit remains tight. Unemployed folk, and those who fear they'll become so, will not be buying houses. And most of the first-time buyers who could take advantage of the tax break will have already done so.

The U.S. jobs number for January, to be published in a couple of weeks, may show the first gain in employment for almost two years. If there is a gain, however slight, it will be embraced as another green-shoots sign of nascent economic recovery. If there is no gain, it will be a disappointment. Either way, there are few signs that jobs are going to come roaring off the once-great U.S. economic assembly line. And that, in turn, means the Federal Reserve will keep its overnight lending rate basically at zero as long as it takes to see the "U" recovery taking shape.

That, somewhat counterintuitively, is good news for the stock market, which has had its very own V-shaped recovery independent of the underlying economy. As long as the Fed is on hold on rates, stock prices might continue to maintain their momentum. As soon as there's an indication that rates are set to rise, watch out for a pullback in stocks.

Indeed, observers looking for bubbles in asset prices, like those that brought down the housing and stock markets, might be tempted to see a mini-bubble forming in share prices today, just as some are worrying about a bubble in Canadian house prices.

For now, though, there is no bubble on the horizon for Hawaiian housing. In fact, with the Canadian dollar nearing par with the greenback, with low, low mortgage rates, with local house prices in the bargain bin and with a particularly severe winter, some Canadians will be looking to buy on Maui or on any of these other warm and wondrous isles.