Knowing what happened when it burst in the US, Ireland and other countries, one question is whether Canada has a real estate bubble in its urban markets. Carney and others say (hope) no, but he keeps interest rates low, encourages spending and warns people not to go into debt.
“The Economist thinks Canadian housing is overvalued by a third relative to income. The Fitch ratings agency pegs the overvaluation at 20 per cent.
To be sure, Mr. Carney no longer sounds as worried about a housing bubble as he did last year. On Wednesday, he indicated that repeated warnings by him and Mr. Flaherty may be scaring Canadians straight, curbing their appetite for debt. But both men are up against history. When property prices get this frothy, pendulum swings are more likely than soft landings.
Such is the pickle in which Mr. Flaherty and Mr. Carney…find themselves. Their risky experiment in guiding Canada through the recession by stoking housing demand is threatening to come undone. Household debt (largely the result of ever bigger mortgages) remains much higher in Canada than it was in the U.S. just before the 2008 crash. It wouldn’t take much to turn a vulnerability into a calamity.”
When a financial bubble bursts, wealth decreases with the fall in expenditure on real estate and other products, and a general recession. What are the facts about housing prices in Canada? The source is http://www.housepriceindex.ca/Default.aspx
The index for Canadian cities shows that, from mid 2005 to the present, real estate prices have risen:
Approx av.per annum %
Toronto 46% 6.6
Ottawa 41% 5.9
Calgary 61% 8.7
Vancouver 62% 8.9
If that was the annual rate of inflation for all goods and services since 2005, it would be cause for concern. Should it be for housing?
Looking outside of Canada, when times get tough, foreigners put their money in gold, Swiss bank accounts and real estate in a number of countries. This is especially the case for buyers from developing countries and places where there is less security. North America and in the past Europe have acted as depositories for such foreign funds.
Is this the case now? And are Chinese and other foreign investors inflating the Canadian real estate market? There is plenty of wealth in the Middle East, India and other parts of SE Asia besides China. Australia appears to think that there needs to be some control on foreigners buying real estate if they don’t intend to live there. So far Canada has made no such moves. Should they?
China’s Potemkin cities, built for several million inhabitants, but remaining empty or ghost cities, provide an example of the vagaries of real estate investing, which may have some relevance for Canada. These cities, which the Chinese government finances in order to maintain investment spending, are to westerners the result of unusual policies. Chinese however appear willing to invest in ghost cities without much (any) hope of renting, selling or living in their properties. If they buy under these conditions, why would they not invest in Canadian real estate also?
Well, according to their own government they are not allowed to, but this appears to do little to curb the ways found to circumvent these rules. Add to that the wealth of investors in India, the Middle East and other parts of Asia and the real estate buying pressure from foreigners is added to that of already free spending Canadians.
My strong impression is that we do have the makings of a real estate bubble, and the cocktail circuit in Canada confirms it. There people are boasting about buying condos as investments even though rental rates don’t cover the costs at present, and will be even harder to justify when interest rates rise and prices fall. Foreign buying adds to this upward pressure on prices.