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Threat of housing bubble has resurfaced
Published Tuesday, August 31, 2010 5:05PM MDT
Last Updated Saturday, May 19, 2012 12:34AM MDT
Canada's housing market could still be in for a U-S style correction, despite a slow down in home sales across the country.
The warning comes from the Canadian Centre for Policy Alternatives, which released a report that analyzed the factors that cause a bubble.
A real estate bubble is an artificial increase in property values which maxes out a homeowners ability to pay.
When the bubble bursts, and values drop, owners are stuck with mortgages worth more than their homes.
The CCPA found that prices in six of the country's largest housing markets, including Calgary, have hit 30-year highs and are in bubble territory.
It says home prices are roughly five to 11 times greater than Canadians' annual income -- much higher than historical comfort levels.
Canadian housing sales are down 25 per cent since reaching a peak at the start of the year.
But this downward swing is not reflected in home prices. In major cities, prices are up about 14 per cent in June from a year ago.
The centre warns that a rise of one per cent to 1.25 per cent in mortgage rates would be enough to cause a housing crash similar to the one in the U-S.
The report says housing bubbles occur when prices rise more rapidly than inflation, household incomes and economic growth.
The C-D Howe Institute, another think tank based in Ottawa, cautioned against reading too much into the centre's research.
It says Canada's mortgage policies have already prevented a housing bust and will continue to reduce the risk in the future.
It says a decline in underwriting standards played an essential role in the U-S. housing market boom and dramatic bust. And while monetary policy was very similar in both countries from 2000 to 2008, housing markets were structured and regulated differently.
For example, Canadians are required to put down a minimum of five per cent on a home, compared to zero per cent down in some states.
A spokesperson for the Canada Mortgage and Housing Corporation agrees. Richard Cho says CMHC is not expecting a U-S style free fall in prices. In fact Cho says the
CMHC forecast suggests prices will rise over the next year by an average of four percent.