up 72 per cent: As sales grow, so does the pessimistic talk of it being a bubble
Garry Marr
Province
The heated debate about whether the Canadian housing market is in the midst of a bubble is likely to continue in the new year thanks to December sales that set a new record for the month.
Listed existing homes recorded their best December ever as the recovery in the Canadian housing market saw sales climb 7.7 per cent last year from 2008, according to the Canadian Real Estate Association. Despite the impressive rebound, the 2009 market saw a decline of 10.7 per cent from the record-breaking pace set in 2007.
There were 27,744 units sold in December, up 72 per cent from a year earlier.
The stakes are high as the Canadian housing industry battles the government, which has not ruled out tougher requirements for homebuyers to cool the market. Two scenarios rumoured to be under consideration include increasing the minimum down payment from five to 10 per cent and shortening the length of amortizations from 35 years to 25 years — moves that would drive many consumers out of the market.
This past week, the mortgage brokerage industry produced a report showing much of the Canadian market has opted for locking its rates into longer terms, thereby providing a shield against rising interest rates that most predict will come by the middle of this year.
“We think that dismissing housing risks is being a tad Pollyannaish, but it’s all the rage in Ottawa circles these days . . . ,” said Derek Holt, an economist with the Bank of Nova Scotia. “The industry is full of talk of an unsustainable non-bubble, whatever that is, and driving a message that borrowers are all acting out of utter forward-looking brilliance.
“A key debate is whether housing will experience a soft-landing toward lower volumes and prices, which is possible, or experience a more sudden decline in activity in the back half of the year and into 2011, which we think is likely.”
Holt is suggesting that as short-term interest rates go up as much 200 basis points by the middle of next year and supply finally builds up in the Canadian marketplace, prices could drop by 10 per cent.
“If you blinked during this cycle, there was no correction,” said Holt, who believes the market needs to have more of a pullback than it did in late 2008 to early 2009. Home prices in Canada climbed five per cent in 2009 after falling less than one per cent in 2008.
There is no arguing housing has had a strong run. The average sale price of a home climbed almost 103 per cent over the last decade, compared to about a 40 per cent increase for the Canadian stock market. By comparison, the average house price increased just eight per cent during the 1990s.
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