Canada's Housing Bubble

Feb 12 2010 Greg Quinn businessweek.com

Bloomberg  - Stephen Jarislowsky, chairman of Montreal-based investment adviser Jarislowsky Fraser Ltd., said he is “convinced” there’s a bubble in Canada’s housing market, fueled by government measures that encouraged consumers to take on debt.

“They have basically encouraged people to buy houses based on cheap mortgages,” Jarislowsky, 84, said in a telephone interview from Montreal. “That has created the opposite effect of what was desirable.”

Stephen Jarislowsky, chairman of Montreal-based investment adviser Jarislowsky Fraser Ltd.

Canadian home prices and resales will grow to records this year, boosted by low interest rates, the Canadian Real Estate Association (CREA) said in a report this week. Canadian new-home prices rose 0.4% in December from the previous month, the sixth straight gain, government figures showed Thursday.

"I am convinced there is a housing bubble in Canada," said Mr. Jarislowsky, whose investment fund owns shares in Canada's four biggest banks, including Toronto-based Royal Bank of Canada.

The comments by Mr. Jarislowsky, who is one of Canada's wealthiest investors with a fortune worth $1.85-billion according to Canadian Business magazine, contrast with the view held by Finance Minister Jim Flaherty, who sees "no clear evidence" of a housing bubble, his spokesman, Chisholm Pothier, said this week.

Tax Credits

Existing home sales will increase 13% and the average price will gain 5.4% to $337,500, according to CREA.

Mr. Jarislowsky said the government should have put more stimulus money into boosting infrastructure, not household spending. Prime Minister Stephen Harper has brought in a temporary tax credit for home renovations, given a tax break to first-time home buyers and purchased mortgages from banks to encourage new lending.

Bank of Canada Governor Mark Carney, meanwhile, has also pledged to keep his main interest rate at a record low 0.25% through June unless the inflation outlook shifts.

The average five-year mortgage rate was 5.39% on Feb. 10. In May it was 5.25%, the lowest since 1951 according to Bank of Canada figures.

"I conclude that the prices of housing today in the U.S. are cheaper than they should be, and that the prices in Canada are far more expensive than they should be," Mr. Jarislowsky said.

Tools to Fight

Bank of Canada Adviser David Wolf said in a January speech that it's "premature" to conclude there's a bubble in the housing market, and a rate increase to slow it would "be dousing the entire Canadian economy with cold water, just as it emerges from recession."

The Department of Finance in 2008 said Canada Mortgage and Housing Corp. would limit amortizations to 35 years and offer loan insurance on only 95% of the loan value. The government's housing agency had offered mortgage insurance on loans worth as much as 100% of the home value and amortization periods of as many as 40 years since 2006.

Mr. Pothier said this week the government has policy tools available to counter any negative "trends" in the housing market if needed. He didn't elaborate.

The booming housing market partly reflects the strength of Canada's financial system, which was named the soundest in the world for two consecutive years by the Geneva-based World Economic Forum.

To be sure, Mr. Jarislowsky said that consumers are stretched with respect to their debt burdens and that the government should seek to bring spending back to a sustainable pace.

"Excess spending by the consumer and going further into debt was the worst thing that they could do, and that is what has happened in Canada," he said.