Housing bubble or just heated?

What a difference a year makes. Last November, the economy was said to be on the verge of the next Great Depression, sucking the life out of a housing market that was coming off a record year in 2007.

Flash forward 12 months. The Canadian Real Estate Association said this week resales were up 73% and prices up 19% in November from a year ago. The fear now is that the housing market is too hot, stoked by record-low interest rates.

Among economists, the talk is of a bubble forming. David Rosenberg, chief economist with Gluskin Sheff & Associates, suggested housing values are 15% to 35% above the level they should be at, based on such fundamentals as personal income and residential rents.

Bank of Montreal's Douglas Porter, a reluctant addition to the bubble ranks, was 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 bank rate hike that could come as early as July 2010 and the July 1 implementation of the harmonized sales tax in British Columbia and Ontario.

"We could see a bit of a buying frenzy this coming spring ... followed by a 'pop' in 2011."

One real-estate industry veteran, who asked not to be identified, wonders whether economists are now calling for a crash to grab headlines. "They are all piling on the bubble story now."

On the surface, the national statistics do look sensational but Canada's most expensive markets 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 sales. Last month's sales in Toronto were almost double that of a year ago, but were down from October.

Peter Vukanovich, president of Genworth Financial Canada, which controls about 25% of the country's mortgage-insurance market, was more emphatic. "There was nobody buying anything a year ago." He fails to see a bubble forming.

Rates continue to drive the market, Mr. Vukanovich said, noting a large majority of his clients have been switching to fixed-rate products, leaving them less exposed to rate hikes.

As well, for the second consecutive month, new listings are up 5% from a year ago, although still not enough to meet buyer demand. Inventory is at its lowest in two years.

(This is a condensed version of a Financial Post story that ran Dec. 16/09 prepared by Gary Marr/National Post