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Real Estate News: Bank of Canada Rates in House Boom Prompt Bubble Talk

December 8, 2009

Bank of Canada Governor Mark Carney’s pledge to freeze record-low borrowing costs through June may be raising the chances of a bubble in home prices even as it helps the economy recover from its first recession in 17 years.

Sales of existing houses rose 74 percent in October from the January low, with prices up 21 percent from a year ago to a record C$341,079 ($322,381), partly because of Carney’s promise — the only date-specific commitment from a Group of 20 central banker. To prevent the economy from overheating, Carney will raise his benchmark rate by 125 basis points to 1.5 percent in 2010, while Federal Reserve Chairman Ben S. Bernanke will keep his key rate at 0.25 percent, said Stephen Gallagher, chief U.S. economist in New York at Paris-based Societe Generale SA.

“The worry has got to be that you might be getting a housing bubble out of this,” said David Laidler, a former visiting economist and special adviser at the Bank of Canada and now a fellow at the C.D. Howe Institute, a Toronto research group. Laidler is a member of the institute’s Monetary Policy Council, which studies central-bank decisions and said in a Dec. 3 statement that a “possible unintended effect” of Carney’s commitment is “the buoyancy of mortgage lending, particularly variable-rate mortgages, and the housing market.”

Carney, 44, has made it clear that stimulus is his priority. Only if the outlook for inflation shifts would the bank break its promise, he has said.

The central bank hasn’t talked much about house prices, “to the bafflement of international investors,” said Eric Lascelles, chief economist and rates strategist with TD Securities Inc. in Toronto.

“It makes perfect sense that there is a good appetite for the housing market,” Lascelles said. What isn’t clear is “whether this is a bubble in the making or simply a recovery from earlier softness.”

Read the entire article “Carney Bank of Canada Rates in Housing Boom Prompt Bubble Talk” by Alexandre Deslongchamps and Greg Quinn for Bloomberg.com

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