Housing Market 2010

"We would, in essence, be dousing the entire Canadian economy

with cold water, just as it emerges from recession," Wolf said in an Edmonton speech delivered on behalf of deputy governor Timothy Lane, who could not travel to the Alberta capital for personal reasons.

"As a result, it would take longer for economic growth to return to potential and for inflation to get back to target," he added.

Finance Minister Jim Flaherty has also openly discussed policy measures to cool the housing market, including raising the minimum down payment requirement above five per cent, or reducing the maximum length a residential mortgage can be amortized from the current 35 years.

Monday's speech came hours after Canada Mortgage and Housing Corp. released a report indicating the annual rate of housing starts reached 174,500 units in December, up nearly 10,000 from November.

The organization said the improvement in housing starts was broad-based, with solid increases in both single and multiple starts to end the year.

Klump said the rise in new supply in market as well as increase in resale market will let some of the air out of tires in the balance between supply and demand, adding that as 2010 progresses price increases will shrink to the rate of inflation.

Wolf said that even if the bank judged that housing prices were getting out of hand, raising interest rates is too blunt an instrument since it would have the effect of cooling off the entire economy.

Statistics Canada also released figures Monday that pointed toward growth in the housing sector, showing construction intentions in the residential sector are starting to approach their pre-downturn levels, rising 9.1 per cent in November to $3.8 billion.

Contractors took out $5.9 billion in building permits in November, down 4.6 per cent from October.

But Statistics Canada reports that they were 23.1 per cent higher than November 2008 and 62.8 per cent above February 2009, when their value bottomed out amid the economic downturn.

Klump said the current hot market is unlikely to cause a bubble because the economy is on an upward swing, reducing the probability of a massive decline in housing demand.

"I don't see where the catalyst is going to come from for some kind of massive decline or popping of any quote unquote bubble," he said.

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Housing Market In The Beggining Of 2010

Accelerated activity in the housing market is part of the natural flow of economic recovery, according to the Bank of Canada and housing economists working to deflate theories about a new housing bubble that could drive the Canadian economy back into recession.

The Bank of Canada indicated it was premature to be talking about a housing bubble in Canada in a speech delivered Monday by bank official David Wolf. His remarks came after months of highlighting the danger of Canadians getting in over their heads in purchasing homes.

"Recent house price increases do not appear to be out of line with the underlying supply/demand fundamentals," Wolf said. "We see the housing market requiring vigilance, not alarm."

Wolf said the bank considers the current hot market to be a phenomenon based on temporary factors, such as pent-up demand from the recession, and low mortgage rates.

Moreover, he noted that with starts below long-term demographic requirements, the number of houses on the market is still declining.

The Canadian Real Estate Association reports housing prices increased about 4.4 per cent over the first 11 months of 2009, and predicts a further increase of 4.7 per cent in 2010.

The association's chief economist, Gregory Klump, said the year-over-year increase has been "turbocharged" by a combination of today's strong market and the weak year-ago market, which skews average prices.

He added that the current increase is part of natural real estate cycle.

"One would expect that when the worst of a recession is behind us and we've got emergency low interest rates, that would draw buyers back to the market," he said. "A lot of the supply that moved to the sidelines is coming back to the market and is expected to continue to come back, making for a balanced market and smaller price increases going forward."

Bank of Canada governor Mark Carney has warned for months that Canadians are amassing too much consumer and mortgage debt and that could be a problem for the broader economic recovery if rates rise and debt payments begin to increase for millions of Canadian households.

The Bank of Canada has said interest rates will probably rise after the middle of the year as the economic recovery takes hold and the impact of stimulus spending creates potential inflationary pressures in the economy. However, Monday's comments suggest the central bank won't push rates higher just to cool the housing market.

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Rise Of The Home Sales

Despite signs long-term mortgage rates are creeping up, the housing market is continuing is bounce back to life according to the Canadian Real Estate Association.

In June 8.7% more homes were sold than in May.

It's the fifth straight month of increases -- a 17.9% increase over June 2008.

"This rebound reflects the releasing of a pent-up demand by buyers who moved to the sidelines towards the end of last year," said CREA chief economist Gregory Klump.

"Now there are signs the worst of the recession may be behind us, those people are emerging."

The bounce back was strongest in British Columbia where 39.8% more homes were sold in June this over the same month last year.

According to the CREA report,

Ontario was up 15.7%,

Quebec 9.8%,

Alberta 22.2%,

Saskat chewan 25.2%

Manitoba 0.2%.

This surge in home buying came despite a decision by Canada's five big banks last month to raise five-year fixed mortgage rates 40 basis points from 5.45% to 5.85%.

The decision was made despite the Bank of Canada's efforts to keep borrowing low by pledging to hold interest rates at the historic low of 0.25% until the middle of 2010.

Mary Webb, a senior economist with Scotiabank, says the low long-term interest rates in the spring were a reflection of a global economy with almost no signs of growth and that was bound to change.

"Now we're looking for a recovery, and not just in Canada but globally, and we're seeing it already in China and we expect growth to strengthen later this year and early next," Webb said.

With more people borrowing, banks are being forced to pay more to borrow the money they lend to home buyers and that drives up long-term interest rates, she said.