By Jay Bryan, The Gazette January 17, 2012
Are Canadian home prices really floating on top of a big bubble? Probably not. But there continue to be reputable observers who are willing to describe today’s undoubted priciness as a “bubble.” Why is this?
Much of problem is a simple problem of word inflation. “Overvaluation” isn’t very scary, so analysts who want to ensure that they’ll attract some attention are tempted to use the term “bubble,” which actually means something far worse than just high prices.
Thus BCA Research in Montreal issued a report last month saying that home prices here show “many of the signs of a classic bubble.”
But if you read the report, it actually described a case of mild overvaluation, one that might result in price stagnation. Even if Canada were hit with an improbably bad recession and spike in unemployment, the report said, prices would fall maybe 10 per cent. This is no bubble.
While a serious recession could hammer home values in Canada, anything short of this probably wouldn’t have much effect, says the report, because Canada’s real-estate market simply doesn’t have the severe flaws that set the scene for U.S. home prices to collapse.
Mortgage-lending standards in Canada were always high and have become tougher still over the past year, unlike the U.S. market, where poorly qualified borrowers were actually encouraged to get in over their heads.
Canadian homeowners are more conservative, too, building up equity in their homes rather than supporting overspending through home-equity loans.