Housing bubble fears overblown

Housing bubble fears overblown

Are home prices getting ahead of themselves in Canada? Almost certainly. Can big price gains go on much longer? Probably not.

There’s little doubt about this view. It’s shared by economic analysts, bankers and even by Canada’s real estate industry itself. In fact, the Canadian Real Estate Association has just predicted a national drop in home prices next year.

So there no doubt that Canada’s housing market is in a bubble, right? Wrong. All the agonizing over a possible bubble is actually very strong evidence that we don’t have one.

We do have an overheated market, and that means prices could stall or ease down within the next year. But that’s exactly what they should do in a normal real-estate cycle, points out economist Michael Gregory of BMO Capital Markets.

After all, widespread worry about a bubble is the opposite of what drives a real one: the disappearance of normal caution, replaced by a near-universal delusion that no matter how costly an asset, it’s a good buy because prices can only go higher.

This delusion can last for years, as with the stock market’s tech bubble. It was 1996 when Federal Reserve Chairman Alan Greenspan warned of “irrational exuberance” in the market. But prices kept soaring until the collapse began in 2000.

After that came the U.S. housing bubble, which peaked in 2005 and may finally have hit bottom after prices fell for more than three years, losing an average of more than 30 per cent.

This was characterized by the very same mass denial of reality. Even Greenspan denied a housing bubble was forming, and ordinary wage-earners became real estate speculators with borrowed money, reasoning that house prices never fell.

Now, there’s simmering worry about a Canadian housing bubble, based on the remarkably fast rebound of house prices here after a brief, violent crash triggered by the 2008 U.S. financial crisis. This week, the concern got more visibility when the venerable Wall Street Journal, where big Canadian stories are rare, belatedly discovered it in a front-page article.

But the large volume of hot air expended on this issue doesn’t seem to be matched by an equal quantity of careful analysis.

The most prominently quoted source in the Journal article, for example, wasn’t an economist or real estate expert. It was Garth Turner, a former politician who wrote a book two years ago predicting the collapse of housing prices in Canada. It didn’t happen and economists never took Turner’s analysis seriously, but he keeps making the same prediction.

There are many cooler heads around, but their comments make less exciting media fare, since they don’t foresee any dramatic catastrophe.

Economist Gregory, for example, has just taken another look at the supposed bubble and agrees with many other analysts that home prices have certainly risen too high by historical standards. But he also concludes that there’s no bubble and, furthermore, that there is very little chance one will appear.

Instead, Gregory finds, prices are being driven higher by factors like credit conditions that are temporarily too loose and a shortage of listings to meet the strong demand generated by record-low lending interest rates.

But there are at least a couple of buckets of cold water about to hit this overheated market. First, interest rates are expected to start rising this summer or fall. Second, a new tax on real estate will hit two of Canada’s biggest, hottest markets, British Columbia and Ontario, in July.

In any event, he believes, there is no evidence of the kind of speculative activity that always accompanies a bubble. We don’t see speculators flipping homes for a fast buck or people buying two or three homes, hoping to sell later for a profit. When this kind of stuff is happening, the volume of mortgage loans soars, but in Canada, mortgage volume is growing sedately, at about the same pace as prices.

Finally, Gregory notes that once supply rises enough to satisfy demand more adequately, price gains should cool. And that’s just what is starting to happen as listings rise and home construction rebounds.

His prediction: talk of a housing bubble, which has become a bit of a bubble itself, should deflate by summer.

Gregory thinks home prices could keep rising for a few months as buyers rush to beat higher interest rates and new real estate taxes, but by midyear, the housing market will be cooling, with prices stabilizing or beginning to drift down.

jbryan@ thegazette.canwest.com

Posted via web from Toronto Real Estate News | Blog

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About Tariq Sultan
Dear Readers, I am a dedicated Toronto, Ontario based real estate professional who has been successfully meeting and exceeding the needs of his clients for past several years. I am actively involved in the insurance, financing, and mortgage industry. Real estate is not only my career – it is my passion. I strive to continuously provide my clients with exceptional service to ensure they are fully satisfied when it comes to their real estate needs. For any real estate related inquires contact me today, I will be happy to assist you. Best wishes, Tariq Sultan

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