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Real Estate News: Is Our Real Estate Housing Market In A Bubble?

December 11, 2009

Floating high on a delicate housing bubble

(Source: Globe and Mail )

If being 15%t to 35% overvalued isn't a bubble, then it's the next closest thing

Is the Canadian housing market in a bubble? It sure looks that way.

At a time when personal income is down about 1% over the past year, we have seen nationwide average home prices soar 21% to hit a record high, as did home sales. Even factoring in inflation, home price appreciation is now back to where it was in 1989. Back then, interest rates were far higher, but the economy was also in the late stages of a phenomenal expansion, not making a transition from deep recession to nascent recovery.

While the Canadian economy is recovering now, overall growth is still barely above zero as manufacturers grapple with excess inventories, a strong currency and soft demand south of the border. Employment conditions have improved but they are hardly healthy, as we saw in the November jobs report, where wages and the workweek were both down despite a constructive headline number. Even though home prices did come off a soft base from a year ago, so did most other economic indicators and they are still down from the depressed levels prevailing at this time in 2008.

As to the question of whether home prices are in a bubble, if it walks like a duck…

Driving prices to new record highs here – at a time when home values are still down 30 per cent from the peaks in the U.S. – is a very tight supply backdrop (close to 4 months’ supply in some major markets) and surging demand. Even though housing starts have hit 11-month highs in the single-family sector, we are 40 per cent below the overbuilt levels that touched off the home price slide in the early 1990s – back then, the unsold inventory broke well above 10 months’ supply in the Toronto area.

You also can’t have a home price bubble without a dramatic credit expansion. Over the past year, residential mortgage balances have risen 7 per cent, which does not sound like a lot, but, in the context of deflating personal incomes, it is huge. In fact, mortgage debt relative to Canadian household incomes just moved above 70 per cent for the very first time ever from just over 65 per cent a year ago.

What is fascinating is that mortgages on the books of the chartered banks have actually declined over the last 12 months, while the issuance of securitized mortgage products has ballooned by nearly 40 per cent and 100 per cent of them been insured by the government (over the past two years, 90 per cent were insured).

What happened here was the Canadian government’s move to save the housing market from a collapse via the Insured Mortgage Purchase Program – currently, if you have only have a 5-per-cent down-payment for a home, you are eligible for an insured mortgage with a 35-year amortization to boot, which, along with record-low mortgage rates, has dramatically improved the financing costs in residential real estate. For current borrowers, carrying costs are very low, but here is the rub, rates have nowhere to go but up; only the timing is open for debate.

Moreover, based on anecdotal evidence, 40 per cent of the $60-billion of mortgages issued in 2009 were in very short-term maturities and vulnerable to any shift in central bank policy. Since house prices have risen so far and so fast, and because personal incomes are flat-to-down, housing affordability measures for new housing entrants are actually tied for being the most onerous ever. This may end up curbing demand, and if the surge in building permits morphs into an actual dramatic supply response in the coming year, a significant reversal in the housing market would rattle the nerves of even the most hardened market participants.

Read the entire article “Floating high on a delicate housing bubble” by David Rosenberg in today’s Globe and Mail.

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