Buzzonomics: Why a housing bubble won’t surface until at least 2013

By Kiyoko Fujimura

Mark Carney has left interest rates unchanged since September 2010. And, in the face of higher consumer prices throughout 2011, market watchers have wondered whether or not Carney’s flexible attitude toward interest rates was the correct one.

But, as the year unfolded, the dull roar from the economics community has been muted. The somewhat surprising European crisis (at least in terms of its magnitude) coupled with the ailing US economy gives Mark Carney the ability to say what every Central Banker wants to say: “I told you so”. After all, Canadians would not have fared well with contractionary monetary policy in the face of a massive global recession.

So how does this impact the housing market? Those who insist housing prices are over-valued usually say there is one event that will show the true colours of the market: when interest rates rise.

Basically, it will reveal whether or not the “overzealous-first-time-home-buyer” types failed to consider the potential that their payments would go up when the economy returned to normal.

It looks like it’ll be a long time before that happens though. According to the Globe and Mail:

“Although Canadian growth in the second half of the year appears stronger than the central bank anticipated in its October forecast, Mr. Carney said the global economy’s prospects have ‘weakened considerably,’ the European crisis now “appears barely contained,” and as a result, slack in the domestic economy will persist ‘well into 2013.’”

So…it’s potentially a bad spot to be in. We can’t know whether or not Canada’s housing market is over-inflated until mortgage-holders are “tested” through an interest rate hike. And apparently that’s not going to happen until 2013.

The housing market has remained resilient throughout 2011. And if 2012-2013 continues on the same trajectory then even if housing prices aren’t overvalued now, they could be at that time. The market’s resilience now will only further exacerbate the problem later– that is, if it exists to begin with.

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  • Pug

    I think this article is a waste of time to read. It’s pointless. I hope the writer put more though inthis article to prove a point before spreading unnecessary rumor or fear in the market. Look worldwide, it’s the symbol of strong economy when the house is ‘over-valued”. Look deeper and further when you want to scare people. Isn’t NYC over valued ? Isnt hong kong over valued ? How about china and Japan and London and Paris ? Look at the affordability. Period

  • Kiyoko

    Hi Pug,

    Thank you for the comment, I always appreciate constructive feedback on my posts!

    I would say this: it’s more about the trends in cities than just the stagnant, nominal affordability numbers at any one time.

    The Centre for Policy Alternatives published a report in August 2010 which shows a number of interesting graphs indicating that Canadian housing markets, especially in our major markets (i.e. Toronto, Vancouver), have been trending dangerously similarly to the major housing markets in the US pre-crash. You can check out the report here:

    Canadian home prices have more than doubled in the past 10 years.

    The real test of whether Canadians can actually afford the homes they’re in will be when interest rates actually increase. Analysts initially predicted that rates would rise late 2010, then they projected they would rise in 2011 and now, there is very little to indicate that rates will rise in 2012.

    Many analysts believed that the rise in interest rates would cool the housing market and put a stop to over-valuation– but that just hasn’t happened yet.

    As to your international examples of cities/countries that are overvalued…

    New York has experienced a drop in housing prices since the downturn in the US. Japan experienced a serious housing crisis in the 90s (eerily similar to the one in the States). London’s prices went down post-recession. People in Hong Kong are worried that there is a housing bubble as well.

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