Housing bubble to burst?

Tuesday, August 31st, 2010

High prices in top six cities showing signs of crumbling

Norma Greenaway

A housing-bubble burst is a rare economic phenomena in Canada. It’s hit Vancouver twice, in 1981 and 1994. Photograph by: Wayne Leidenfrost, PNG, Postmedia News

Steep housing-price increases in six of Canada’s hottest real-estate markets since 2002 have all the hallmarks of an “accident waiting to happen” if mortgage rates rise too sharply, warns a new report.

The report by the Centre for Policy Alternatives says smart mortgagerate setting is needed to prevent the bubbles hanging over the housing markets in Vancouver, Edmonton, Calgary, Toronto, Ottawa and Montreal from bursting.

“The hottest six real-estate markets could be in for a correction at best or, at worst, a bubble burst,” writes David Macdonald, author of the report. “Rate setters at the big banks are in the driver’s seat now as mortgage rates inch up. They need to hit the breaks lightly.”

Chief concern is the price increases in those markets are outside the “historic comfort level,” which makes them more susceptible to mortgagerate changes, the report said.

The average, inflation-adjusted house price in the cities has historically held stable at between $150,000 and $220,00 in today’s dollars. But the current average price in all six major markets now is over $300,000, it said.

Macdonald says a housing-bubble burst has been a rare phenomenon in Canada. Since 1980, it has only happened three times — in Vancouver in 1981 and 1994 and in Toronto in 1989.

“But the steep rise in house prices in so many cities displays all the hallmarks of an accident waiting to happen,” Macdonald writes, adding the price increases have exceeded the growth in inflation, household incomes and economic growth.

The report traces the trend in large part to low mortgage rates and access to easy credit, which can encourage buyers to purchase homes they might not otherwise be able to afford.

Macdonald called on the big banks and other mortgage lenders to stick to slow, gentle increases to mortgage rates to avert the bottom falling out of housing prices.

He also recommended returning to pre-2006 mortgage rules, which required a downpayment of 10 per cent and a 25-year mortgage. The current rules call for five per cent down and a 35-year mortgage.

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