From Great Depression to 'bubble of a bubble'
Flash forward 12 months. The Canadian Real Estate Association said Tuesday existing-home sales in November were up 73% from a year ago and prices rose 19% during the same period. The fear now is that the housing market is too hot, stoked by record-low interest rates.
Among economists, all the talk is of a bubble forming. David Rosenberg, chief economist with Gluskin Sheff & Associates Inc., kicked off the discussion with his note that suggested housing values were 15% to 35% above where they should be based on fundamentals such as personal income and residential rents.
Bank of Montreal's Doug Porter, a reluctant addition to the bubble economist ranks, was still hedging his bet. "We're on the bubble of a bubble," said Mr. Porter, who is worried there will be a stampede to buy homes ahead of a central bank rate hike that could come as early as July, 2010 and the implementation of the harmonized sales tax in British Columbia and Ontario that takes effect one month later.
"We could see a bit of a buying frenzy this coming spring...followed by a "pop" in 2011?" said the economist, a note.
One senior real estate industry veteran, who asked not to be identified, wonders whether economists are now calling for a crash to grab themselves headlines. "They are all piling on the bubble story now," he said.
The national statistics do look sensational on the surface. The average sale price in November climbed to $337,231 in November. That was a 19% increase from a year ago but if you add all the sales together for the first 11 months of 2009, prices are only up 4.4%.
Canada's most expensive markets continue to skew the numbers. Greater Vancouver had a 252.7% increase in sales last month from November, 2008 but a year ago there were a paltry 874 in sales for the entire city. Toronto November sales were almost double where they were a year ago but they actually fell from October.
"It was an extraordinary weak housing market a year ago," said Gregory Klump, chief economist with CREA who says by May, 2010 average price increases will shrink because that's when markets began to recover in 2009.
Peter Vukanovich, president of Genworth Financial which controls about 25% of the country's mortgage insurance market, was more emphatic. "There was nobody buying anything a year ago," says Mr. Vukanovich, who says there may be a couple of small pockets in Vancouver and Toronto that are "heated" but he doesn't see a bubble forming.
Rates continue to drive the market but Mr. Vukanovich says the good news is consumers have been switching into fixed rate products, leaving them less exposed to expected bank rates hikes.
"Over 80% of production for the last month was in fixed rate mortgages with a very significant portion of it in the five-year [closed] mortgage," he said. "That's why I'm as confident about the market as I am."
The market may also begin to benefit from the headlines because for the second straight month new listings were up from a year ago. New listings across the country rose 5% on a seasonally adjusted basis, although it was still not enough to be meet the insatiable buyer demand. Based on current activity, there is only four month of inventory in the housing market, the lowest figure in two years.
Millan Mulraine, an economics strategist with TD Securities, said rising prices may actually be discouraging Canadians from listings their homes. "You're not going to list your home for the sake of it because you are going to have buy another house," he said. "We had a very sharp correction in a short space of time in Canada. What is happening is the unwinding of that and that's happening very quickly too."
gmarr@nationalpost.com
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