Is there a Canadian housing bubble?: Scotiabank
Scotiabank economists Derek Holt and Karen Cordes address the housing bubble question examining Canadian valuations using a number of measures. They find prices to be “rich by any measure,” but conclude that they may go higher before they come down.
“Canadian house prices are rich no matter how one looks at it, but they are likely to become richer yet before material risks emerge later next year and beyond. The implications for the Canadian economy, mortgage markets, and monetary policy must, however, take full consideration of profound microeconomic differences between the Canadian and US mortgage markets. We also argue that the implications of strong house price gains on the Bank of Canada’s conditional commitment to keep rates on hold until the end of 2010Q2 are exaggerated for seven key reasons.”
Read the full report here.
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There's 11 Comments So Far
November 25th, 2009 at 3:19 pm
I’m wondering if this kind of talking is what should be giving me concerns. As rates start to go up, house prices could drop as my mortgage payments go up.
That makes me wonder if I should sell my house now, take whatever tiny amount over the top I can make (or nothing!) and wait…
November 25th, 2009 at 4:44 pm
Alex,
This doesn’t sound like you.
I suppose if you believe we’re in for a big collapse it might be the right thing to do but do you want to become a speculator? You’ve said many times that home ownership shouldn’t just be about the money. Are you in a position where you might need to sell it in the next couple of years?
Personally, I love my home and I’m not prepared to give it up in a sell high, buy low kind of attempt.
November 26th, 2009 at 7:54 am
Thanks for covering this Norm. The “bubble” word is being thrown around far too liberally these days. I spoke with Pedro Antunes, director, national and provincial forecast at The Conference Board of Canada for a blog entry I posted on this subject. His take was spot on: “There are two areas in Canada that are very conservative; one is banking and the other is residential development. We haven’t seen any over-activity in relation to the fundamentals.”
November 26th, 2009 at 1:59 pm
No, it certainly isn’t like me and I don’t look to speculate, which is why I said break even. My wife and I love our house quite a fair bit. It’s nice to know that it’s accumulated some value even in a few years, but it’s nothing we’re about to race for.
At the same time though if rates were to affect my payments, I’d find myself in a less than favorable position. I’d much rather be preemptive about it than find out that I just waited through the last chance to avoid the losses.
I guess realistically I really can’t see interest rates going up, it would be devastating to our already paper thin economy.
November 26th, 2009 at 3:19 pm
Alex:
Rates *will* go up. Everything goes in cycles, and nothing is going to stay at historical lows forever, no matter how much damage it causes. This is why bankruptcies too go in cycles, where those businesses and individuals who overextended themselves are called to account, and those who were conservative have the opportunity to scoop up those peoples’ assets at bankruptcy prices. (No offense intended; I’m dealing in abstracts, where I’m sure the situation is much more real to you.)
The only question is ‘when’ and that’s what all the pundits and prognosticators are trying to predict. Remember, though, that even the BoC didn’t promise to keep 0% rates past this summer…
If you’re thinking you may need to get out, then doing so ahead of the wave is probably not a bad idea. What are the details of your mortgage? (I think you have posted the information before, so I don’t believe I’m asking for anything you’re not willing to reveal… but if you consider it personal/private then please pardon my effrontery.)
November 26th, 2009 at 3:31 pm
Kevin,
Appreciate the visit and the comment. Thanks.
Alex,
I agree with everything Bookrat said. Isn’t your rate locked in for another four years or so?
November 26th, 2009 at 6:14 pm
Bookrat,
Agree with you completely… in the long run. In the long run we’re all dead as the saying goes. Interest rates got into record low territory back in 2001 and have bounced around ultra low territory ever since. Thats 8 years so far. Incidentally I was saying what you are saying now back in 2001.
Japan has had central bank rates around 0.25% since mid 90’s with no end in sight.
Having said all that I am embarassed to say I do think rates will rise
However this is just my ‘opinion’, in reality I know I could be dead wrong for another decade.
November 26th, 2009 at 9:09 pm
I am stuck in one of the dreadded 40 year mortgages. I’m actually not 100% certain on the rates, I know it was low-ish. I bought in January of 2007. Norm, if bookrat provides the information for you to send it to him you can give him my email address. Sorry, I guess you’re the middle man here!
I have a few more years to go with the current rate. I’m just not sure what I can do or where else I can go at this point. What I’m somewhat safe in knowing is apparently my house has increased in value, so the penalty fees at the very least can be absorbed.
November 26th, 2009 at 10:13 pm
Alex,
There are lots of different mortgage calculators that you can use to calculate the cost of refinancing at different rate scenarios. I agree wholeheartedly with Bookrat and Norm that there is only one direction for interest rates to go, and barring some very short-term fluctuations, they’re unlikely to go sideways for long.
I don’t know the details of your mortgage either, but if you’re less than 5 years in with a 40-year amort it’s unlikely that you’ve paid much, if anything, down on the principle. If I’m wrong about this, forgive my ignorance. Those longer terms result in drastically higher interest costs if you take the entire term to pay it off. Over 40 years, interest costs alone can cost you twice the amount of the property itself. However, if you need to go with the 40 year amortization for current cash flow issues, I would suggest that you take any extra money during the year and put it down on the mortgage as that will help decrease the interest burden in the long term. This will also help out when it’s time to refinance that loan.
Best of luck to you.
November 27th, 2009 at 8:34 am
Jen,
All very good advice, although I wish I had the option to do any of what you suggest. Extra money is something I am just not lucky enough to encounter. I have no idea how most people manage to buy houses at current prices, but I can assure you – I am not one of them!
You’re right in thinking I haven’t paid much on the principle. I barely came in with a down payment.
I still feel as though I should be cautious about this and plan ahead so that I can make good of what I did manage to get myself now, rather than wait until later and suffer for it.
November 27th, 2009 at 8:53 am
Alex,
I think that’s an excellent idea, and again, I wish you the best of luck. If there’s anything you think I might be able to do to help, please say so. I’d be happy to.