Housing market in bubble territory?
Thursday, December 17th, 2009The Canadian housing market is getting dangerously close to “bubble territory” and is likely headed for a correction in the second half of 2010, according to a top economist.
“We are certainly at risk of a full-blown bubble,” said BMO Nesbitt Burns deputy chief economist Doug Porter, who expects to see a “modest” market correction next year with prices taking a hit.
The extent of the correction depends on how much prices increase in the next six months, he said. After dropping at the start of the year, resale house prices have surpassed the peaks of the past year. Research by the bank to be released Wednesday says housing valuations are likely “richer than equity valuations” in the current market.
“The higher we climb, the bigger the risk of a correction,” Porter said.
He said characteristics of a bubble economy include speculative buying, a massive amount of credit on the market, and sales and prices of homes “going north without the economy tagging along.”
Cities such as Vancouver and Toronto, which have had significant activity, stand the most risk of a correction, he said. “You are seeing a lot of line ups at sales centres and speculative buying in those cities.”
Existing home sales rose for the third straight month in November, up 73 per cent from 2008, according to figures released Tuesday.
A total of 36,383 homes sold in November, according to the Canadian Real Estate Association. That figure is just under a percentage point short of equalling the November record for home sales set at the peak of 2007. The average price of a home was up 20 per cent year over year to $368,665.
In Toronto, sales hit 7,466, about double the total from last November, when the financial crisis set in.
The volatility means homebuyers continue to be nervous about the economy, according to a poll released Tuesday by Royal LePage of their 1,225 agents across Canada.
“This kind of unsustainable volatile market really creates uncertainty in people’s minds,” said Phil Soper, president and CEO of Royal LePage.
According to the poll, 38 per cent of Royal LePage agents say economic factors such as job security are the number one issue with buyers. Another 23 per cent said their clients fear they wouldn’t be able to get the price they wanted for their home, and 12 per cent said some customers are hesitant to sell because the market had not hit bottom. About 20 per cent said they had no concerns from clients.
Soper says that unlike the U.S., rapid price rises have been “a matter of weeks” during the second half of the year, compared with south of the border, where the bubble developed over more than four years.
“The market has a way of sorting through things and we hope it’s in a measured way. As affordability erodes one thing you will see is that more people won’t qualify for lending and activity will ease off,” said Soper.
Some good news for buyers is that the return of strong demand means that more sellers are returning to the market. Seasonally adjusted new listings rose 5 per cent on a month over month basis in November, the biggest monthly increase since January of last year.
Tony Wong
BUSINESS REPORTER
