The Montreal Gazette: What housing bubble? Canada's bubblet ending with faint pop - "In spite of all the angst, reality moving along a different track."

May 6, 2010 - Canada's little housing bubblet is coming to an end. Here comes (maybe) the crashlet.

This description doesn't make for a screaming headline, but it's about the best an honest analyst can do with Canada's stubbornly healthy, stable housing market.

In spite of all the angst expended in recent months on media accounts of a growing Canadian housing bubble, reality continues to move along a different track.

Prices, while high in some markets, aren't anywhere near bubble territory, say several economists, and now they're about to stall, bringing things back into balance.

With mortgage interest rates moving up sooner than expected and the outlook tilting toward still more increases, there could even be enough of a cooling to bring price cuts in some markets.

Economist Pascal Gauthier at the Toronto-Dominion Bank now believes home prices across Canada will fall by an average of 2.7 per cent next year.

That's not a bad thing in a market where, by Gauthier's calculations, prices are now peaking at a level roughly 15 per cent higher than fair value, based on such fundamentals as income growth in recent years.

That's high enough to make it healthier for the market to pause for a while, even if it's nothing like the approximately 50-per-cent overvaluation seen at the peak of the U.S. housing boom.

With prices edging down, then stabilizing, and incomes rising by about four or five per cent a year, the average home price could be back near fair value within three years, Gauthier suggested yesterday.

This is a much more pleasant scenario than what we might see if we had another few years of strong price gains. While there's no justification now in talking about a bubble, such continued increases could have created one, predicts economist Sal Guatieri at BMO Capital Markets.

At this point, Guatieri isn't persuaded that prices will actually drop, but he agrees that the blazing demand of recent months is about to cool considerably.

It's quite likely that price gains will slow to a snail's pace by late this year, believe both Guatieri and economist Robert Hogue at the Royal Bank.

Indeed, measures of recent real-estate transactions already suggest some cooling.

The latest report on the Teranet-National Bank house price index, which is designed to produce precise measurements by comparing prices paid when the same home is sold twice in a few years, showed year-over-year home prices up by 7.5 per cent in January. January's rise of half a percentage point was the smallest in nine months.


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Marlene Ofter

Marlene Ofter

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