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"Is Canada headed for a possible housing bubble to burst?? ..."
"The steep rise in house prices in so many cities displays all the hallmarks of an accident waiting to happen..."
Steep housing price increases in six of Canada’s hottest real estate
markets since 2002 have all the hallmarks of an “accident waiting to
happen” if mortgage rates rise too sharply, warns a new report.The
report by the Centre for Policy Alternatives says smart mortgage rate
setting is needed to prevent the bubbles hanging over the housing
markets in Vancouver, Edmonton, Calgary, Toronto, Ottawa and Montreal
from bursting. “The hottest six real-estate markets could be in
for a correction at best or, at worst, a bubble burst,” writes David
Macdonald, author of the report. “Rate setters at the big banks are in
the driver’s seat now as mortgage rates inch up. They need to hit the
breaks lightly.” The chief concern is the price increases in
those markets are outside the “historic comfort level,” which makes
them much more susceptible to mortgage rate changes, the report said. The
average, inflation-adjusted house price in the cities has historically
held stable at between $150,000 and $220,00 in today’s dollars. But the
current average price in all six major markets now is over $300,000, it
said. Macdonald says a housing bubble burst has been a rare
phenomenon in Canada. Since 1980, it has only happened three times — in
Vancouver in 1981 and 1994 and in Toronto in 1989. “But the steep
rise in house prices in so many cities displays all the hallmarks of an
accident waiting to happen,” Macdonald writes, adding the price
increases have exceeded the growth in inflation, household incomes and
economic growth. “Canada is experiencing for the first time in
the last 30 years, a synchronized housing bubble across the six largest
residential real-estate markets in Canada.” The report traces the
trend in large part to low mortgage rates and access to easy credit,
which can encourage buyers to purchase homes they might not otherwise
be able to afford. “While housing may be ‘affordable’ based on
record low rates, the affordability situation in Canada could change
rapidly if mortgage rates return even part way to their historic
norms,” the report says. Macdonald, a research associate with the
centre, said in an interview he doesn’t expect mortgage rates to
increase much in the near term. His concern is three to five years down
the road. Macdonald called on the big banks and other mortgage
lenders to stick to slow, gentle increases to avert the bottom falling
out of housing prices. He also recommended returning to pre-2006
mortgage rules, which required a down payment of 10% and a 25-year
mortgage. The current rules call for five per cent down and a 35-year
mortgage. Macdonald says the best scenario would be to have
housing prices stagnate over the next five to 10 years while inflation
slowly eats away at their value. The goal should be to get prices
back to the “comfort zone” where house prices are in line with
inflation, he said, and where owners will neither gain nor lose a lot
of money when they sell.
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