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Reports conflict on housing bubble possibility
2 reports paint different pictures of Canadian market
Last Updated: Tuesday, August 31, 2010 | 3:57 PM ET Comments645Recommend309The Canadian Press
Home prices that continue to inflate even as sales and construction activity fall sparked conflicting views in two new reports Tuesday over whether the Canadian market is in a precarious housing bubble that could burst at any time.

In the view of the Canadian Centre for Policy Alternatives, prices in six of Canada’s largest housing markets are in bubble territory for the first time in 30 years — and a U.S.-style correction is still not out of the question.

The Canadian Centre for Policy Alternatives is warning Canada may be facing a U.S. style housing bubble. (iStock)But the C.D Howe Institute dismissed the possibility in its own report, which concluded that Canada’s cautious mortgage lending policies will protect against a housing crash similar to the one that has hammered the market in the United States.

A debate over whether Canada has a housing bubble that could crash the country’s fragile economic recovery has re-emerged amidst recent data showing prices remain about 15 per cent higher than last year while sales continue to peter out.

That will cause a problem for homeowners who have overextended their finances when mortgage rates inevitably rise beyond historically low rates and make it more difficult to carry a mortgage on homes that are overvalued.

Many of the concerns about the Canadian housing market are motivated by the recent experience in the U.S., where one in 10 homeowners faces foreclosure.

C.D. Howe report suggests little likelihood of bubble
But there is little likelihood of a surge of foreclosures or a collapse of house prices in Canada, according to the C.D. Howe report entitled “Not Here? Housing Market Policy and the Risk of a Housing Bust.”

That’s because of the country’s tighter mortgage requirements — which include a minimum down payment of five per cent, as opposed to zero down at some U.S. banks, as well as regulations against risky lending, and a much smaller high-risk subprime mortgage market, the C.D Howe report says.

“The small number of high-risk loans underwritten suggests that the modest decline in Canadian house prices predicted for 2011 is very unlikely to trigger a U.S.-style surge in foreclosures,” Jim MacGee, an economics professor at the University of Western Ontario, wrote in the C.D Howe report.

U.S. home prices fell about 30 per cent between 2006 and 2009, while Canadian prices fell only about nine per cent before a rapid bounce back last year.

But the CCPA report is not as confident about Canada’s ability to avoid a sharp correction in home prices and says the steep rise in house prices in so many Canadian cities is an “accident waiting to happen.”

Home prices now sit at 4.7 to 11.3 times Canadians’ annual income — much higher than historical comfort levels of between three and four times income.

It would take only a one to 1.25 per cent mortgage rate increase by Canada’s big banks to cause a housing crash similar to the one the U.S. is grappling with, says David Macdonald, author of the report.

However, many economists at the big banks have concluded that Canada’s once overheating housing market, which began to cool in the second quarter of the year, has stopped just shy of a bubble.

© The Canadian Press, 2010

Read more: http://www.cbc.ca/money/story/2010/08/31/con-housing-bubble.html#ixzz0yLu8Tvsd

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