Housing Rebound in Canada Spurs Talk of a New Bubble
Last Wednesday, a housing-price index for Canada’s six biggest cities posted its seventh straight monthly gain, showing home prices in November are now back to their prerecession peak. Another broader measure shows the average home price in 2009 hitting a record.
To stimulate its economy, the government has focused on the domestic slice. In an effort to boost internal consumption, it has kept a key interest rate near zero, resulting in exceptionally low mortgages rates. Consumers have responded. Average home prices in Canada have risen 23% from their trough in January 2009.
Some economists who are concerned point out that home prices are rising far faster than other measures of economic health. In a December report, the Bank of Canada warned that household debt—largely mortgages—was 1.42 times disposable income during the second quarter of 2009, a record high.
« This is exactly what happened in the U.S., when affordability had moved way out of whack with prices, » says David Rosenberg, an economist who witnessed America’s housing bubble at Merrill Lynch in New York, and now sees similar trends up north from his post at Toronto-based wealth-management firm Gluskin Sheff.
But Canada’s central bankers appear reluctant to take any steps that would hurt the economy. In a Jan. 11 speech, a representative of the Bank of Canada said: « If the Bank were to raise interest rates to cool the housing market now…we would, in essence, be dousing the entire Canadian economy with cold water, just as it emerges from recession. »