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Carney warns on housing markets

Bank of Canada chief says there's a risk 'fear and greed' are driving real estate prices to unsustainable levels

00:00 EDT Thursday, June 16, 2011

OTTAWA and VANCOUVER -- Mark Carney is issuing a sharp warning that the housing market may be overheating, as his ultra-low interest rates, combined with too much optimism on the part of buyers, fuels prices in the country's hottest markets.

Even as growth in mortgage credit has started to slow and prices are expected to moderate, investment in residential properties nationwide is now near peak levels, Mr. Carney said in a speech to the Vancouver Board of Trade.

Without using the word "bubble" to describe a housing market where prices are now 13 per cent above their pre-recession peaks, and without saying the Bank of Canada will take specific measures to tame the sector, Mr. Carney left little doubt that he is concerned.

"The risk is that expectations become extrapolative, prompting the classic market emotions of fear and greed - greed among speculators and investors, and fear among households that getting a foot on the property ladder is a now-or-never proposition," he said.

Tellingly, Mr. Carney noted that in Vancouver, the country's priciest market, as in other "globalized" markets like Sydney and Hong Kong, Asian wealth is coming in as investors diversify and look for hard assets, fuelling valuations that in some cases are "extreme."

That means that even as the central bank sees domestic demand for housing moderating because debt-strapped consumers are tapped out and interest rates will eventually rise, the real estate market could still be buoyed by foreigners, over whom he has little control.

Mr. Carney's warning about the housing market comes a day after a report from the Certified General Accountants Association of Canada showed household debt has hit a troubling $1.5-trillion, sparking new fears that the heavy burden on Canadian consumers could crimp spending and hurt the economy.

Moreover, a report Wednesday from Statistics Canada showed Canadian families' income from earnings, investments and private pensions fell 3.2 per cent in 2009 to $63,000 - the first "significant" drop in market income since the early 1990s.

Fresh data on Wednesday from the Canadian Real Estate Association bolster the notion that Vancouver may not be the only market that's overvalued. The overall market isn't wildly hot - the pace of actual sales is in line with the 10-year average - but prices in continue to escalate, rising 8.6 per cent nationally in May to $376,820 from $346,950 a year ago. And prices are surging in other big cities, with gains of 8.7 per cent in Toronto and 6 per cent in Montreal.

"Some excesses may exist in certain areas and market segments," Mr. Carney said. "The elevated level of 'multiples' inventories, the ample pipeline of developments under way, and heavy investor demand (much of it foreign) reinforces the possibility of an overshoot in the condo market in some major cities."'

"Do we obsess about specific real estate markets in Canada? No," Mr. Carney told reporters at a press conference following his speech. "Our job is to manage policy for the country as a whole."

Indeed, Mr. Carney hinted he is no closer to raising rates than he was two weeks ago, when he kept his benchmark at 1 per cent for a sixth consecutive time, saying "some" of the stimulus in the system will be "eventually withdrawn." The central banker used similar language Wednesday, and also fretted about the European debt crisis and said Canada's annual pace of economic growth in the second quarter may have been less than 2 per cent.

Mr. Carney strongly suggested that the central bank continues to see narrow financial regulation, like steps taken by the Finance Department to make it harder for some Canadians to get a mortgage, as a more appropriate tool than rate hikes.

All of which suggests policy makers still believe they can stay on hold for a while longer with little risk of inflation getting out of hand.

"As long as price stability, on the ground, is not being threatened, the BoC is not going to throw a single tightening punch," Michael Gregory of BMO Nesbitt Burns, said in a note. "Tough talk and other 'moral suasion' morsels are what are being lobbed for the time being."

But interest rates will of course go up some time "in the future," Mr. Carney told reporters.

Mr. Carney said real estate loans now make up more than 40 per cent of Canadian banks' assets, compared with 30 per cent a decade ago, a situation he called "unprecedented exposure."

"The central position of housing assets and liabilities on the balance sheets of both households and financial institutions means that any housing excesses could generate important vulnerabilities in the financial system," Mr. Carney said. "Historically low policy rates, even if appropriate to achieve the inflation target, create their own risks."

As long as rates are so low, Canadian authorities will "need to remain as vigilant" and watch for financial imbalances, he said.

Vancouver is Ground Zero, with prices up an astounding 25.7 per cent to $831,555 - more than 11 times the city's average family income - from $661,745.

Realtors point to immigrants from China as a major factor in neighbourhoods on the city's west side, although this has never been quantified with hard numbers that are publicly available.

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NEIGHBOURHOOD WATCH

Coast-to-coast prices: A real estate snapshotAlong with the highest average home price* in the country in May, Vancouver has also seen the biggest price jump compared to a year ago.

Vancouver / $831,555 / +25.7%

Regina / $296,838 / +17.8%

Toronto / $485,520 / +8.7%

Ottawa / $353,046 / +5.6%

Winnipeg / $248,548 / +4.6%

Halifax / $263,318 / -0.5%

Calgary / $416,055 / -0.5%

Edmonton / $331,537 / -2.7%

*Based on non-seasonally adjusted residential sales.

Figures for Montreal and Quebec City unavailable

Source: Canadian Real Estate Association

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UP, UP AND AWAY

Since 1977, housing prices in Vancouver have gone up. And up. And up again.

Steady population growth and limited land have helped make Vancouver a hot market for the past three decades. As people flock to the area from other parts of Canada and around the world, the housing market has continued its climb. Prices are up 26 per cent over last year, according to the Canadian Real Estate Board.

Asian investors in search of hard assets are also buying Vancouver real estate, as Bank of Canada Governor Mark Carney noted Wednesday.

Staff

GREATER VANCOUVER RESIDENTIAL PRICES

Average sales prices, January 1977 to May 2011, in thousands of dollars

DETACHED: $1,223,421

ATTACHED / CONDOMINIUM: $555,057

APARTMENTS / CONDOMINIUM: $465,422

NOTE: From 1977 - 1984 condominium averages were not separated into attached & apartment.

THE GLOBE AND MAIL // SOURCE: REAL ESTATE BOARD OF GREATER VANCOUVER










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