Does Canada Have a Housing Bubble?

Canada's housing market certainly appears frothy to some observers, but many economists still believe there's little to fear.

Three reports have now put Canada in the bubble category. And this week's big sales numbers, as reported by The Globe and Mail's Tara Perkins, could fan those concerns.

However, expectations of higher mortgage rates are driving people to buy earlier than they otherwise might have, helping to pump up sales in cities like Toronto, Vancouver and Calgary. Coupled with that is the fact that the real estate market was slumping a year ago as the federal government brought in new mortgage restrictions aimed at preventing a bubble.

"The larger story is that, after last year's plunge in response to tighter mortgage rules, home sales have stabilized near normal levels and prices are rising moderately in most regions - a near perfect soft landing with shades of taking flight again," said senior economist Sal Guatieri of BMO Nesbitt Burns.

He was referring to reports this week from some of the country's regional real estate boards. As Ms. Perkins reports, property sales in Vancouver surged 52.5 per cent in August from a year earlier, Toronto a jump of 21 per cent, Calgary a gain of 27.5 per cent, and Victoria an increase of 20.7 per cent.

Prices were up in Toronto and Calgary, though down in Vancouver.

The International Monetary Fund, the Organization for Economic Co-operation, and the Economist magazine believe Canadian properties are overvalued.

They differ somewhat on the specifics, but the sentiment is the same.

In a report last weekend, the Economist ranked Canada as second only to Hong Kong on a price-to-rent reading. In June, the OECD ranked Canada third, behind Belgium and Norway, based on a combination of price-to-rent and price-to-income measures. And late this week, in a report on what it said is a housing bubble in Norway, the IMF put Canada fourth based on the price-to-rent ratio in late 2012, behind Norway, Belgium and New Zealand.

"On this basis, Canada's house prices are bubbly whereas Japan's are undeservedly flat," the Economist said, referring to the price-to-rent reading.

Senior economist Matthieu Arseneau of National Bank took exception to that in a report this week that says immigration is helping to drive population growth, largely in the 20-44 age group, meaning more families in a key demographic where housing is concerned.

"We expect that this phenomenon will cushion the effect of rising mortgage rates on the Canadian housing more," Mr. Arseneau said.

"With economic prosperity depending on a country's ability to attract capital and skilled labour, we are confident that Canada can hold its own for now."

He pointed specifically to The Economist, rejecting its conclusions.

"A more thorough analysis of home price sustainability must also take into account demographics," he said.

"For that reason, we believe that the Canadian housing market will do better than what many observers, including The Economist, expect."

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Leo Manchisi

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