Canada's Dramatic Real Estate Recovery Questions

The dramatic recovery of the resale housing market – with the pace of activity and prices setting another record in October – has some economists wondering if Canada is in the midst of a housing bubble.

Economists at Scotia Capital Inc. are of the view that housing “is becoming an over-valued asset class.”

Economist Michael Gregory of BMO Nesbitt Burns, on the other hand, says Canada is in the midst of a “booming rebound” – but not a bubble.

And Stewart Hall, an economist at HSBC Securities (Canada), says it is too soon to characterize the housing market activity as a bubble yet, but the situation bears watching.

Bubbles are formed when excessive speculation enters a market, pushing prices higher than justified by market fundamentals. However, asset bubbles inevitably pop, leading to sharp price declines.

'This is becoming an over-valued asset class'

“Is Canada in a housing bubble? Probably, but low rates, mortgage innovation and a relative shortage of new supply are likely too keep it going for a while yet,” Scotia Capital economists Derek Holt and Karen Cordes said in a research note Monday.

“… Now that last fall's pent-up demand has been released, the three forces of low interest rates, transferring future sales to the present via mortgage innovation, and modest new supply can keep Canadian housing markets humming for some time yet before the eventuality of a softer market on rising rates in a future relative demand vacuum set in.”

After CREA released the October numbers, Mr. Holt and Ms. Cordes expanded on their view.

“The Canadian Real Estate Association has reported October sales and prices. The results are a bright spot in the Canadian economy, but with prices up 20 per cent over year-ago levels and at all-time highs by virtually every measure, this is becoming an over-valued asset class in our opinion,” the Scotia Capital team said.

“Flagging rich valuations is not, however, tantamount to predicting anything imminent by way of give-back on prices,” the added.

“In fact, they could well push further into record territory next year before risks build.”