Is canada heading for property bubble?

A heated debate about whether the property market in Canada is heating for a bubble has emerged as the latest official figures shows that real estate sales grew 72% in December compared with the same month a year before...

The figures from the Canadian Real Estate Association (CREA) set a new record for the month. But it claims that investors should not read too much into the data as overall the 2009 market saw a decline of 10.7% from the record breaking pace set in 2007.
 
It appears to be the government that is most worried about a property bubble rather than the real estate industry. The government has not ruled out tougher requirements for homebuyers to cool what it regards as a potentially hot market.

Proposals already voiced include increasing the minimum down payment from 5% to 10% and shortening the length of amortizations from 35 years to 25 years, moves that would drive many consumers out of the market, experts warn.

This past week the mortgage brokerage industry produced a report showing much of the Canadian market has opted for locking its rates into longer terms, thereby providing a shield against rising interest rates that most predict will come by the middle of this year.
‘We think that dismissing housing risks is being a tad Pollyannaish, but it's all the rage in Ottawa circles these days. The industry is full of talk of an unsustainable non-bubble, whatever that is, and driving a message that borrowers are all acting out of utter forward-looking brilliance,' said Derek Holt, an economist with the Bank of Nova Scotia.

‘A key debate is whether housing will experience a soft-landing toward lower volumes and prices, which is possible, or experience a more sudden decline in activity in the back half of the year and into 2011, which we think is likely,' he added.

Holt believes that as short-term interest rates go up as much 200 basis points and supply finally builds up in the Canadian marketplace, prices will drop by as much as 10% so there won't be an overheated market.

It is perhaps the fact that the Canadian housing market has now had 11 consecutive monthly sales increases on a seasonally adjusted basis that is worrying some. But CREA chief economist Gregory Klump pointed out that the pace is slowing. ‘These statistics will no doubt spark further bubble talk amongst the usual suspects. Cooler heads recognize that many of the recent gains reflect temporary factors that could fade by summer,' he said.

CREA is still forecasting sales will jump by 7% this year, much of that because the first few months of 2009 were relatively weak. Prices are expected to rise 4.7%.

Source: www.propertywire.com