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No Bubble, Says Flaherty

Housing-BubbleThe government would need to see “clear evidence of a bubble in the housing market” to impose tighter mortgage rules.

“We have not seen (that),” Finance Minister Jim Flaherty told reporters Wednesday.

It would take “dramatic surges in prices in some part of the country” to constitute a bubble, he added.

flaherty“We have seen in the past year some softening in the Canadian housing market, in part due to the tightening of the insured mortgage market rules that we did earlier this year… That’s an appropriate result from that tightening,” he said.

The Finance Department has enacted stricter mortgage rules on three separate occasions over the last 36 months. Yet still, prices have risen.

In any event, while not conceding a bubble, Flaherty did acknowledge “unusual” demand in places like Vancouver.

Canada’s average home price (which is skewed by markets like Vancouver and Toronto) stood at $349,916 in August, according to the Canadian Real Estate Association.

That is up:

  • 7.7% in the last 12 months (or 6.7% if you exclude “high-priced regions,” says BMO)
  • 20% in the last 36 months
  • 103% in the last 10 years.

Soaring prices have brought about lots of negative press as of late — much of it localized. Here’s a sampling:

  • Some parts of the country are “severely unaffordable” (Mark Carney — Bloomberg)
  • “…there is evidence of overshooting in some markets.” (Royal LePage CEO Phil Soper — Canadian Business)
  • “Prices have risen twice as fast as incomes in the past decade.” (Economist Sal Guatieri — BMO)
  • “Developments on the housing front require increased vigilance, and consideration may need to be given to additional prudential measures to prevent a further buildup in household debt” (IMF)




Despite all this, affordability has stayed within reach on a national basis. (Try not to laugh at that statement if you’re buying in Vancouver or Toronto.)

As RBC economist Craig Wright recently wrote: “By and large, the share of household budgets taken up by the costs of owning a home at current market values remains close to historical norms.” That’s according to RBC’s regularly published affordability measures.

Housing demand and prices are driven by lots of things including employment levels, immigration, housing supply and affordability. That last factor (affordability) has been particularly important in the latest housing cycle.

Affordability provides essential support for lofty prices in the big metros. That’s why materially higher mortgage rates and/or stricter mortgage rules could kick a leg out from under the table.

When that sort of thing happens a soft landing can become a crash. Flaherty realizes that and knows he must tread carefully in future policy making.

Rob McLister, CMT