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Category: What's New in 2009

Wolf Says Talk of Canada Housing Bubble ‘Premature

By Greg Quinn and Alexandre Deslongchamps

Jan. 11 (Bloomberg) -- Bank of Canada Adviser David Wolf said it’s premature to conclude the country’s housing market is in a bubble, and indicated policy makers won’t raise interest rates soon.

“It is premature to talk about a bubble in Canadian housing markets,” Wolf said today in Edmonton, Alberta. “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.”

The lowest mortgage rates since the Korean War helped fuel a 67 percent jump in existing home sales in November from their January low, with the average price up 19 percent from a year earlier to C$337,231 ($326,600). The Bank of Canada cut its benchmark lending rate to 0.25 percent in April and has committed to keeping it there through June unless the inflation outlook shifts to aid a recovery.

“They would probably view raising interest rates as a last resort” to slow home price gains, said Craig Alexander, deputy chief economist at TD Bank Financial Group in Toronto, who predicts the central bank will raise rate in the fourth quarter.

‘Overvaluation’

“There is probably a little bit of an overvaluation in the housing market, something in the range of 5 to 10 percent, but if you get an increase in listing supply the market will come back into balance,” he said. It would be simpler for the government to change rules such as minimum downpayments to avoid any bubble, Alexander said in a telephone interview.

The speech is the last scheduled public event for the bank before its Jan. 19 rate decision, and investors expect no increase until September, yields on overnight index swaps indicate. Other reports today suggested further strength in the housing market, with residential building permits reaching a 19- month high and work on new homes at a 14-month peak.

Some of the increase in house prices is explained by consumers buying homes because low interest rates have made them cheaper, and because consumers are more confident at the end of a recession, Wolf said. The stock of homes for sale is also falling as new construction lags demographic changes, he said.

Last month, Governor Mark Carney warned consumers and banks should be cautious about adding to household debts because a rise in record-low interest rates will leave some borrowers unable to pay, a theme Wolf repeated today.

Housing Prices

Household finances were the only risk to Canada’s financial system that has increased since June, the central bank said in a report last month, as the Canadian and global economies show signs of recovering from a recession.

Economists, including David Laidler of the C.D. Howe Institute and David Rosenberg of Gluskin Sheff & Associates Inc., have said the house-price gains signal a bubble may be forming in that market.

“The current revival in our housing sector was a desirable, and intended, part of Canada’s economic recovery, but like all good things, it must be carefully monitored to ensure that it doesn’t go to an extreme,” Wolf said.

The Bank of Canada earlier today reported a survey of business owners showing near-record optimism about their future sales and continued easing of credit conditions.

Wolf isn’t a member of the six-person group that sets the bank’s interest rate. Deputy Governor Timothy Lane, who is a member of the group, was scheduled to give the speech today before he canceled because of “an unforeseen private matter,” the Bank of Canada said.

To contact the reporters on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net; Alexandre Deslongchamps in Edmonton, Alberta, at adeslongcham@bloomberg.net

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