Canada's Housing Bubble

Apr 06, 2010 Ka Yan Ng Reuters

Toronto - Strong housing starts should take some heat out of Canada's property market this year, but there's no bubble in a market that recovered rapidly from recession, the head of the Bank of Canada said in a magazine interview published on Tuesday.

Speaking to Canada's Maclean's magazine, central bank Governor Mark Carney said the domestic housing market "is looking increasingly firmly valued", but he was calm about future prices.

"We're seeing starts up above replacement levels. So we expect to see some moderation for the balance of this year," Carney said.

Canadian housing prices have been rising steadily, with only a hiccup during the recession, and strong prices and bidding wars in urban centers have prompted talk of a housing bubble -- a concept Carney has dismissed before.

Those fears hit home to Canadians, who watched the collapse of the housing market in the United States. The U.S. housing sector has struggled to recover, while the Canadian market is above pre-recession levels in many big markets.

Housing starts have also bounced back more than 60 percent from mid-recession lows, nearing the 200,000 mark in February, another piece of evidence reinforcing views that the residential housing sector is a major cornerstone of the Canadian economic recovery.

The latest industry data also shows the national average home price in February rose 18.2 percent from a year ealier even as sales cooled for a second straight month.

"Certainly there is a concern that the current level of activity in the housing market is unsustainable," said Millan Mulraine, economics strategist at TD Securities.

He said he expects momentum will slow to a more balanced level that is more consistent with economic fundamentals after a likely spring surge in the housing market.

"We will see some continued buoyancy in the housing markets," Mulraine added, citing buyers who may look to get into the market before Canadian interest rate hikes, and ahead of new mortgage rules and tax changes in the provinces of British Columbia and Ontario that will add to costs.

The Maclean's interview, conducted on March 16, also touched on Carney's belief that central banks were a crucial player in helping to smooth financial markets during the panic conditions of the recent financial crisis.

Carney said the Bank of Canada's monetary policy, rooted in inflation-targeting, is one of the reasons Canada escaped the world economic meltdown relatively unharmed.

Carney said that an inflation-targeting bank could temporarily shift from its targets to pop an asset bubble. But markets would have to trust that the departure was temporary, he added.

"The idea that monetary policy can surgically target asset prices is naive and dangerous and diversionary from what we have learned, which is it should have a core focus, which is the consumer price index," Carney said.