A Bank of Canada official earlier today sought to dampen concerns that the Canadian housing market be caught in the same type of bubble that threw the US into recession.
In the Bank of Canada’s view, it is premature to talk about a bubble in Canadian housing markets. Recent house price increases do not appear to be out of line with the underlying supply/demand fundamentals. Moreover, with housing starts below long-term demographic requirements, inventories are still declining. It is likely, though, that a significant part of the surge in housing sector activity is associated with temporary factors – notably the historically low borrowing costs, as well as pent-up and pulled-forward demand – which cannot continue to drive increases in house prices and activity. Thus, we see the housing market as requiring vigilance, but not alarm.
One measure of the “underlying supply/demand fundamentals” of housing is the amount home prices rise relative to rental prices. In normal times they rise at roughly the same rate. In the US, house prices rose over 100 per cent between 2000 and the peak of the housing market in 2007, according to the 20-city Case Shiller index, while rental prices grew just 24 per cent. By contrast, in Canada rental prices rose 11 per cent from 2000 to 2008, while the price of a houses in the Teranet 6-city composite index rose 85 per cent over the same time. Read more