Thursday, June 26, 2008

Canadian Housing Market Not in a Bubble

Canada's housing market does not appear to be in a bubble and is supported by sound fundamentals.

Canada appears not to be in danger of following the U.S. into a housing market meltdown.

The Canadian housing market does not appear to be characterized by excess supply at this time. The proportion of unoccupied, newly built dwellings in most cities remains below historical averages, suggesting that a major widespread reversal in house prices is unlikely in the near term.

The recent downward trend in building permits suggests supply is adjusting to softening demand and, importantly, the Canadian mortgage market is in reasonably good shape.

The Canadian 'subprime' mortgage market accounts for less than 5% of the residential mortgage market, and might be better characterized as a 'near-prime' market, with quite different lending standards than appear to have been applied in the United States.

However, Canadians cannot afford to be complacent and that they need to remember house prices can go down as well as up.

It wasn't that long ago - in the late 1980s and early 1990s, to be exact - that Canada experienced its own real estate boom and bust. It took a decade after that before we saw activity pick up and real prices increase. More recently, of course, we have seen in this part of the country a strong housing market cycle.

Residential investment has averaged about 6% of GDP over the last decade, with about one third devoted to renovations. Some 68% of Canadians are homeowners and real estate accounts for more than $2.2 trillion, or 37% of total household assets in Canada.

A number of factors can influence housing prices in addition to supply and demand such as innovations in financing and policy. Policy-makers and financial market players must be wary of new financial products and ensure that they do not distort the market and really do make markets more efficient.

While Canada has escaped many of the problems of the U.S. mortgage crisis in part because of a more conservative mortgage environment, increasing use of extended amortization periods could have a dramatic impact on the personal wealth and savings of Canadians and new no-money down or low deposit mortgages can also encourage speculative behavior, which can also distort real estate markets.

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