Bank Of Canada Denies Need To Raise Interest Rates To Cool Housing Bubble

A string of monthly price gains for new housing, particularly in Ontario and Quebec, raises the prospect of a bubble in Canada’s real estate market. But the Bank …

A string of monthly price gains for new housing, particularly in Ontario and Quebec, raises the prospect of a bubble in Canada’s real estate market. But the Bank of Canada has been quick to quash any concerns, attributing the recent rally to pent-up demand and affordable financing rather than credit excess while reaffirming its commitment to keeping interest rates down. See the following article from Property Wire for more on this.

New property prices rose more than expected in Canada rising 0.4% in November, the fifth monthly rise in a row and adding confidence for the real estate market outlook for 2010.

The latest published figures from Statistics Canada also show that on a yearly basis, prices fell 1.4% in November following a 2.1% decline in October.

The pick-up in new housing prices follows news from Canada Mortgage and Housing Corporation that housing starts staged a broad-based advance in November, rising 5.9% to an annualized rate of 174,500 units. Resale prices, meanwhile, have risen 21% from a year ago.

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Of 21 metropolitan areas surveyed by Statistics Canada, only three – Hamilton, Saskatoon and Greater Sudbury and Thunder Bay – recorded monthly declines.

The biggest gains were posted in the Ontario region of St. Catharines-Niagara, up 1.4% month-over-month and Quebec, up 0.9%.

Some analysts are already talking about a real estate bubble and calling for a rise in interest rates to cool the property market but this has been dismissed a premature by the Bank of Canada which said that it would be akin to ‘dousing’ the economic recovery with cold water.

‘Recent house price increases do not appear to be out of line with the underlying supply-demand fundamentals,’ said David Wolf, an advisor to the bank’s governor.

Wolf said property bubbles, such as the one in the US that helped spark the global economic downturn, are usually fueled by credit expansion, as borrowers and lenders take false comfort from exaggerated house prices.

The current rally, during which existing-home sales have climbed more than 40% on a year-over-year basis and prices have surged nearly 20%, is largely due to ‘temporary factors’, he explained including low interest rates and pent-up demand. Also some buying was the result of people realizing there is a once-in-a-lifetime opportunity to acquire property with historically cheap financing.

‘These factors cannot continue to drive home sales and prices. Thus, we see the housing market as requiring vigilance, but not alarm. If the bank were to raise interest rates to cool the housing market now when inflation is expected to remain below target for the next year and a half, we would, in essence, be dousing the entire Canadian economy with cold water, just as it emerges from recession. As a result, it would take longer for economic growth to return to potential and for inflation to get back to target,’ he said.

The Bank of Canada has pledged to keep its benchmark rate at a record low 0.25% until July in an effort to foster growth and bring inflation to the central bank’s preferred 2% target which is expected in the second half of 2011.

This article has been republished from Property Wire. You can also view this article has been republished from
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