Mises Wire

Canadian Bubble Exposed

Canadian Housing Bubble

We have been talking about the housing bubble in Canada for some time now. When the US housing bubble burst the Canadian housing bubble continued to inflate, buoyed by high commodity prices and a better regulated banking system. With commodity prices lower and energy prices crashing the Canadian housing bubble is poised to pop with the Canadian people up to their eyeballs in debt. Only recently did the Bank of Canada admit a bubble existed, but stated that it should not be a problem.

 

OTTAWA — The Bank of Canada warned Wednesday that the country’s housing market could be overvalued by as much as 30%, but still predicted it was headed for a “soft landing.”

Why the IMF can’t stop worrying about Canada’s housing market

Canada’s housing market is likely to achieve a soft landing but authorities may need to tighten mortgage rules further to contain vulnerabilities to a crash, the International Monetary Fund said on Wednesday.

Canada avoided the housing market crash that accompanied the financial crisis in the United States. But a post-recession housing boom, fuelled by record-low borrowing costs, has prompted some analysts to warn a bubble may be in the works. Keep reading.

It was the first time, the central bank has put a number on housing market overvaluation, suggesting it was between 10% and 30%.

“This situation raises the risk that a shock to the economy could trigger a correction in house prices,” governor Stephen Poloz told reporters in Ottawa, following the release of the bank’s semi-annual Financial System Review, a closely watched research document on potential shocks and their effects on economic stability.

“The probability of this risk materializing is low, but if it did occur, the effect on the economy would be severe.”

Douglas Porter, chief economist at BMO Capital Markets, said the bank’s 10%-to-30% estimate is “a big range, [and] a similar figure to what they would find in Australia and New Zealand.”

“However, [policymakers] note that the market has been at least 10% overvalued since 2007, and there has been only a ‘modest upward creep’ since 2009.”

That said, the Bank of Canada still believes the housing market is headed for a soft landing — dependent on the global economy gaining strength and as interest rates “normalize.”

The probability of this happening is low . . . But if it did, the effect on the economy would be severe

That statement “is pretty far from ringing alarm bells,” Mr. Porter said.

The bank has held its trendsetting lending rate at a near-record-low 1% since September 2010, giving consumers ample time to pile up debt since the 2008-09 recession. The resumption of rate increases is not expected until around mid-2015.

As well, policymakers feel the overall chance of an “adverse shock” to the country’s financial system has eased since they issued their previous review document in June.

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