Housing Bubble or No Housing Bubble? That is the Question.

There has been talk since December of a housing bubble. Federal Government Finance Minister Jim Flaherty has made hints that he may take measures such as higher down payment requirements or shorter amortizations to slow down any bubble. Since his comments there has been much talk on the matter.

Bank of Canada governor Mark Carney said Canada is not experiencing a housing bubble and he doesn’t see the need for structural changes to the country’s mortgage market, according to a report in Reuters.

“The Canadian mortgage market has functioned I think exceptionally well during the course of the last decade … we’ve seen the strength of the system of mortgage insurance and it’s provided an important funding avenue for the banks as well,” said Carney after a speech in Winnipeg on Feb. 4.

The speaking engagement also gave Carney a chance to address the current talk of a housing bubble forming in Canada due to explosive home sales and escalating prices. He said the strength in the housing market was “expected” due to where monetary policy was and said the bank is “following it closely.”

“We want to caution people that rates are extraordinarily low right now, they’re low for a reason … but it’s a means to an end,” he said.

Most recently, Flaherty has changed his tune. The Globe and Mail reported on February 6, 2010 that Flaherty made comments following the G7 Finance Summit that there is no “compelling evidence” of a housing bubble. It is nice to see that he is finally seeing reality once again.

We do not believe there is a housing bubble. While prices are increasing, and perhaps recovering quicker than anticipated, it is not too rapid. As interest rates increase over then next 3 years we will likely see that values do not continue to rebound as quickly as they have been, but over time expect values to remain stable.