Canada's housing rebound sparks fear of bubble. How many times have we heard this?

Bubbles are for chewing gum and bubble baths

 Steve Ladurantaye

Globe and Mail Update Published on Monday, Nov. 16, 2009 8:15PM EST Last updated on Tuesday, Nov. 17, 2009 7:11AM EST

All Joran Van Lange wants to do is buy a house while interest rates are still low.

The furniture designer and his wife have been trying to find a mid-priced home in Toronto since March. But every time they show up at a viewing, the offers have already piled up and the home sells for thousands of dollars more than they are able to pay.

“It's overwhelming and it's super frustrating,” said Mr. Van Lange, who is looking to spend about $425,000. “We know these low interest rates are our chance to get in – but everything we look at goes for way more than what they were asking. I'm starting to think we'll wait till rates rise and competition fades out a bit.”

Canada's housing market has rebounded so sharply after the recession that some observers are raising the alarm about a bubble in home prices. Yet despite repeated warnings from economists that ultralow interest rates are unsustainable, prospective home buyers like Mr. Van Lange are willing to shrug off the risk.

They're worried instead that if they will miss out on once-in-a-lifetime rates, they'll be forced to pay more for property later.

“Is Canada in a housing bubble? Probably, but low rates, mortgage innovation and a relative shortage of new supply are likely to keep it going for a while yet,” Scotia Capital analysts wrote in a report.

Monday, the Canadian Real Estate Association boosted its sales forecast for the year by 6.6 per cent, saying that 460,200 units will sell this year. That's on pace to match 2004, but still less than levels reached from 2005 to 2007.

But CREA's also forecasting something else: Record-high prices. It raised its 2009 average sale price forecast by 1.5 per cent, to an all-time high of $317,900.

Many buyers sat out the first half of the year to see how the economy would fare, the association said, but rock-bottom interest rates have drawn them out and fuelled the largely-unexpected rebound. Sales increased 41 per cent year over year in October alone, it said.

These gains are being made despite a worsening jobs picture – in October, the unemployment rate hit 8.6 per cent as another 43,200 Canadians lost their jobs – near an 11-year high.

Economists had expected about 10,000 new jobs for the month. Job losses may continue, CREA economist Gregory Klump said, but consumer confidence has been increasing.

“If we have 10-per cent-unemployment, that means 90 per cent of people are employed,” he said. “People are re-entering the market – they have the confidence to take advantage of bargain-basement prices. There's been a release of pent-up demand, and that has a long time to play out. Prices have gone as low as they are going to go.”

Scotia Capital economist Derek Holt said in an interview that he doesn't expect a repeat of the meltdown in the United States, where prices have fallen as much as 50 per cent in some cities and subprime mortgages (and their resetting interest rates) coupled with rising unemployment forced many to abandon their homes. Rather, he said prices will come down slightly as new homes hit the market and higher interest rates deter those with lower incomes.

A Canadian can get a variable-rate mortgage as low as 2.5 per cent right now, as the Bank of Canada has locked its lending rate near zero to spur economic activity. Mr. Holt expects the average mortgage to creep toward 5 per cent within three years, which could mean hundreds of dollars more a month for the average mortgage holder.

For example, a five-year variable rate mortgage at 2.25 per cent on $300,000 would carry a monthly payment of about $1,300, assuming a 25-year amortization period. A move to 5 per cent would boost the payment to $1,750.

“I think that causes a slight pullback on prices,” he said. “Right now, you have conditions that only come around once in a century and it can't stay that way forever.”

Housing sales rebounded across the country in October, setting new records in Toronto, Montreal and Ottawa.

New listings, however, are on the decline. Inventories were down to 4.1 months – the lowest level in two years. Housing inventory measures the number of months it would take to sell current listings at the existing rate of sales activity.

“New listings are still expected to rise in the coming months, in response to headline average price increases,” Mr. Klump said.

“New supply dropped dramatically in December last year and earlier this year in response to a difficult pricing environment. Sellers who moved to the sidelines should be drawn back to the market as prices rise further over the rest of the year and in early 2010.” As taken from an e-mail from Philip BeerRegional Vice PresidentStreet Capital Financial Corporation2401-1 Yonge StreetToronto, ON


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