Mon Jan 11, 7:58 PM
By Sunny Freeman , The Canadian Press
A hot housing market is part of the natural flow of economic recovery, according to the Bank of Canada and economists working to deflate theories about a new housing bubble that could drive the economy back into recession.
The Bank of Canada indicated it was premature to be talking about a housing bubble in Canada in a speech Monday by bank official David Wolf. His remarks came after months of highlighting the danger of Canadians getting in over their heads in purchasing homes.
"Recent house price increases do not appear to be out of line with the underlying supply/demand fundamentals," Wolf said. "We see the housing market requiring vigilance, not alarm."
Wolf said the bank considers the current market to be a phenomenon based on temporary factors, such as pent-up demand from the recession, and low mortgage rates.
Moreover, he noted that with starts below long-term demographic requirements, the number of houses on the market is still declining.
The Canadian Real Estate Association reports housing prices increased about 4.4 per cent over the first 11 months of 2009, and predicts a further increase of 4.7 per cent in 2010.
The association's chief economist, Gregory Klump, said the year-over-year increase has been "turbocharged" by a combination of today's strong market and the weak year-ago market, which skews average prices.
He added that the current increase is part of natural real estate cycle.
"One would expect that when the worst of a recession is behind us and we've got emergency low interest rates, that would draw buyers back to the market," he said. "A lot of the supply that moved to the sidelines is coming back to the market and is expected to continue to come back, making for a balanced market and smaller price increases going forward."
Recovery in Canada's housing market, where average home prices were up 11 per cent from July to September over the year-ago same period, leads developed countries, according to Scotia Economics' Global Real Estate Trends report released Monday.
Adrienne Warren, senior economist at Scotia Economics, said Canadian homes are about 10 to 15 per cent overvalued, meaning there are risks if the economic revival does not play out as expected.
But she added that a bubble is unlikely because activity is based on fundamentals, not speculation.
"Because the housing market is interest rate sensitive...(it is) really the first area of the economy to revive. Once interest rates begin to move higher...then you'll start to see the housing market being one of the first areas to begin to cool off," Warren said.
"(But) I don't think the risk of a sudden, widespread shock and rising default rates is likely," she said. "I think it's more just get braced for a softer market beyond 2010."
Bank of Canada governor Mark Carney has warned for months that Canadians are amassing too much consumer and mortgage debt and that could be a problem for the broader economic recovery if rates rise and debt payments begin to increase for millions of Canadian households. However, Monday's comments suggest the central bank won't push rates higher just to cool the housing market.
"We would, in essence, be dousing the entire Canadian economy with cold water, just as it emerges from recession," Wolf said in an Edmonton speech delivered on behalf of deputy governor Timothy Lane, who could not travel to the Alberta capital for personal reasons.
"As a result, it would take longer for economic growth to return to potential and for inflation to get back to target," he added.
Finance Minister Jim Flaherty has also openly discussed policy measures to cool the housing market, including raising the minimum down payment requirement above five per cent, or reducing the maximum length a residential mortgage can be amortized from the current 35 years.
Monday's speech came hours after Canada Mortgage and Housing Corp. released a report indicating the annual rate of housing starts reached 174,500 units in December, up nearly 10,000 from November.
The organization said the improvement in housing starts was broad-based, with solid increases in both single and multiple starts to end the year.
Klump said the rise in new supply in the market as well as the increase in the resale market will help the balance between supply and demand, adding that as 2010 progresses price increases will shrink to the rate of inflation.
Wolf said that even if the bank judged that housing prices were getting out of hand, raising interest rates is too blunt an instrument since it would have the effect of cooling off the entire economy.
Statistics Canada also released figures Monday that pointed toward growth in the housing sector, showing construction intentions in the residential sector are starting to approach their pre-downturn levels, rising 9.1 per cent in November to $3.8 billion.
Contractors took out $5.9 billion in building permits in November, down 4.6 per cent from October.
But Statistics Canada reports that they were 23.1 per cent higher than November 2008 and 62.8 per cent above February 2009, when their value bottomed out amid the economic downturn.
Warren said the construction figures are a response to tight supply in the resale market and will help to alleviate some of the pressure on the supply side.
Klump said the current hot market is unlikely to cause a bubble because the economy is on an upward swing, reducing the probability of a massive decline in housing demand.
"I don't see where the catalyst is going to come from for some kind of massive decline or popping of any quote unquote bubble," he said.