November 25, 2013


Title: Resale home prices hit new record

Subtitle: Debate persists regarding whether residential real estate is in bubble territory. 


In testimony before the Senate Banking Committee last week Stephen Poloz, governor of the Bank of Canada, gave an excellent example of how experts can avoid responsibility for facilitating significant overvaluation in Canada’s housing sector.


Poloz got headlines by saying that there was no “bubble.” However he then tempered the statement with a slew of qualifying clauses related to “imbalances,” “risks,” “high household debt” and the possibility of “outside disturbances,” which signalled that we in fact may be quite near bubble territory.


If residential real estate proves to have been significantly overvalued, Poloz will pull out his qualifying remarks, as proof that he warned everyone. However his widely-quoted talking point (the denial that a bubble exists), ensures that few people actually hear his warnings. 


Poloz’s remarks, which come from one of Canada’s most visible economic figures, mirror those of a wide community of housing sector “experts” whose job in large part consists of presenting a positive economic outlook, to advance the interests of the organizations they represent.  


If housing was widely recognized to be significantly overvalued, central bankers would be forced to tighten lending conditions. This would slow the economy, and the jobs of the politicians who appointed those central bankers would be on the line when the next election hits. Construction firms (even those in hot areas such as Toronto’s condo market) and residential real estate salesmen would have to moderate “hard sell” tactics.


That’s why, despite the fact that the average price of homes sold via the Canadian Real Estate Association hit a record $391,820 in October, the most severe warnings you will hear from most sector stakeholders relate to a possible “soft landing.”


For example Fitch Ratings, which said last week that Canadian housing is now 21 percent overvalued, refrained from using the B-word. The agency noted that home prices have surged by 130 percent since 2001 (far faster than income which grew by just 80 percent) but projected that home prices will either flatten or decrease (not crash) over the next five years. 


Another interested party, the Canada Mortgage Housing Corporation (which guarantees more loans when home sales increase), forecast that housing starts will continue at a robust pace of about 185,000 units in 2014, this despite the fact that home building has outpaced household formation in recent years.


A good rule of thumb when analyzing Canada’s housing sector is to thus also get opinions from those with less of an axe to grind.


Examples include two highly respected UK-based publications. One, the Financial Times of London warned earlier this month that Canadian residential real estate is “perched precariously at its peak.” Another, the Economist magazine, has repeatedly noted that housing prices are far in overvalued territory in relation to both incomes and rents.  


Whether the outsiders or those with skin in the game are closer to the truth remains to be seen.


Stay tuned.











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