Title: More bubble talk

Sub-title: A recent study concludes that Canada’s residential housing market has entered bubble stage. But many experts disagree.


When Canadian housing sector stakeholders hear the word “bubble,” they typically think of the United States. There, during the past decade, house prices skyrocketed to record highs, fed by cheap interest rates and no-questions-asked loans, and then came crashing back down. Many US homes lost more than half their value from peak levels.  


But Canadians generally believe that their conservative mindsets, and sound, responsible banks, mean that this could never happen here. Or could it? Well yes, it could, says David Macdonald, a researcher with the Canadian Center for Policy Alternatives. “Housing prices for 20 years prior to 2000 stayed in a historical range of between three to four times provincial annual median income,” he writes in a recent report titled Canada’s Housing Bubble. “Today however housing prices cost (between) 4.7 to 11.3 times Canadians’ annual income.” 



Macdonald notes six cites where he claims the bubble has spread to: Toronto, Vancouver, Calgary, Edmonton, Montreal and Ottawa. “The residential real estate market now is more unstable than it has been in a generation,” he writes.


Rising cries from the sidelines

The Canadian Center for Policy alternatives isn’t the only voice issuing warnings about Canada’s rising housing prices. Gadfly author and former Member of Parliament Garth Turner has long sounded the alarm. Since the 2008 release of his book “The Greater Fool,” Turner has been telling anyone that will listen that Canadian housing is vastly overvalued. One Canada’s largest business magazines also ran a cover story on the subject. As if that wasn’t enough, last week David Rosenberg, an economist at Gluskin Sheff, said that he thought the United States was in a depression, not a recession. If true this would almost certainly have dramatic repercussions for Canada’s economy and its real estate markets.


Macdonald’s study for the CCPA outlines three scenarios as to how Canada’s housing bubble might end: market correction through price deflation, the bubble bursting slowly over a period of time and the bubble bursting rapidly and steeply. He identifies new homeowners, those which carry high loan-to-value mortgages and seniors, who are hoping to use the equity in their homes to fund their retirements, as those who a housing crash would hurt the most.


Mainstream economists disagree

The problem is that although the bubble crowd makes good arguments, few mainstream economists, including those that work for the major Canadian banks, think tanks, and the Bank of Canada agree with their assessments. Marc Pinsonneault, an economist with National Bank Financial is typical. “The situation in Canada is poles part from the United States, which is still in the midst of a major crisis,” he says.


According to Pinsonneault, a key driver of housing sector demand is household formation, which his firm expects will remain at the 200,000 level between now and 2015. “While there could well be some softening in average selling prices between now and year-end, we are unlikely to see the unwinding of a bubble,” says Pinsonneault. “The only factors at this point that would change our scenario would be a significant rise in mortgage interest rates, or a significant weakening of the economy.”


Not to be outdone by the Canadian Center for Policy Alternative’s report, other, more pro-business think tanks released opinion pieces that took a different tact. “The housing market has lost luster,” writes Mario Lefebvre, in a piece published by the Conference Board. “However this will not lead to a free fall for Canada’s housing market.”


Jim MacGee, of the C.D. Howe Institute, takes a similar tact. “Canadian housing policies, which avoided the sharp decline in underwriting standards seen in the US, worked well in reducing the possibility of a housing bust in Canada during 2008-2009, and continue to mitigate the risk of massive defaults in the future,” commented MacGee.


Who to believe?

With all of the contrary opinions out there, it’s hard for the layman to figure out who to believe. While Canada’s banks, its major think tanks and the Bank of Canada, all have substantially more credibility than those who argue that a housing bubble is at hand, it pays to remember that major established institutions, generally have very conservative institutional mindsets.


As a result, when major changes are at hand, it is often outside thinkers, like Turner and the CCPA, that get a wind of them first. At this point, it’s hard to say which group is right. In fact the thing about bubbles, is that you often only realize that you were in one, after it burst.


All we really know for sure right now is that there appears to be a bubble building in the amount of commentators available to talk about bubbles.


Peter Diekmeyer (peter@peterdiekmeyer.com) is a Montreal-based freelance business writer.





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