Housing bubble theorists abound

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 yesterday existing-home sales in November were up 73% from a year ago and prices rose 19% during the same period. The fear now is that the housing market is too hot, stoked by record-low interest rates.

Among economists, all the talk is of a bubble forming. David Rosenberg, chief economist with Gluskin Sheff & Associates Inc., kicked off the discussion with his note that suggested housing values were 15% to 35% above where they should be based on fundamentals such as personal income and residential rents.

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

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

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

On the surface, the national statistics do look sensational -- a 19% year-over-year sale-price increase in November -- and Canada's most expensive markets continue to 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 what they were a year ago, but were actually down from October.

"It was an extraordinary weak housing market a year ago," said Gregory Klump, CREA's chief economist.

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," said Mr. Vukanovich, who acknowledges a few small, "heated" sales pockets in Vancouver and Toronto but fails to see a bubble forming.

Rates continue to drive the market, Mr. Vukanovich said, noting consumers have been switching to fixed-rate products, leaving them less exposed to expected bank rate hikes.

"Over 80% of production for the last month was in fixed-rate mortgages with a very significant portion of it in the five-year [closed] mortgage," he said. "That's why I'm as confident about the market as I am."

The market may also begin to benefit from dire headlines: For the second consecutive month, new listings are up over a year ago. New listings across the country rose 5% on a seasonally adjusted basis, although still not enough to be meet buyer demand. Based on current activity, there is only a four-month inventory in the market, the lowest in two years.

(prepared by Gary Marr/Financial Post/National Post)


BY THE NUMBERS

+73% Increase in resale homes sales from November 2008.

-0.4% Difference in sales activity from November 2007, the high for that month, and November 2009.

+19% Increase in national residential average price from November 2008 to November 2009.