Housing Market Showing Signs of Bubble
According to a report recently released by investment firm Edward Jones, Canada’s real estate market is showing two of the three characteristics of a housing bubble.
The report said that “despite recent economic strength”, the price of real estate has outpaced the economy including “unemployment trends and Gross Domestic Product Growth”.
According to Edward Jones, the three characteristics of a real estate bubble are:
- overvalued house prices
- easy access to credit
- lax regulation.
We’ve definitely got the first two conditions met. That is, unless you think that a $1 million bungalow in Vancouver isn’t overvalued and that historic low interest rates didn’t allow thousands of people access to practically free money.
As for the third characteristic, finance minister Jim Flaherty is feeling confident that the government has that base covered with the recent changes to the lending criteria for mortgages. Throw in rising interest rates and the HST being introduced to British Columbia and Ontario later this spring and the real estate market should slow down.
Chief economist at Gluskin Sheff + Associates, David Rosenberg, recently cautioned about a “looming real estate-related slowdown”, although he doesn’t predict as dramatic a bubble as that experienced in the United States. Interestingly though, Rosenberg proposed that Canada may have already experienced its bubble in the past year.
Meanwhile Bank of Canada Governor, Mark Carney, testified recently that the real estate market will weaken in the second quarter of 2010, basically saying that the central bank is not worried about the possibility of a housing bubble at this point.
The difficult thing about real estate bubbles is that you can only see them in hindsight. Is Rosenberg correct in thinking that it’s possible that we’re already past the worst of the bubble? Whether he is or not, the speculation continues.
