A cautious word on real estate prices
Globe and Mail
Perhaps the only thing more certain than sunrise lately has been that Canadian real estate prices keep going up, up, up. The average price of a resale home jumped more than 11% last month compared with August of 2006. Prices of new homes were up almost 8% in July. With the prospect of hefty increases in value, it’s little wonder that many Canadians are flocking to financial institutions, borrowing money, bidding up home prices and perhaps buying beyond their means. It could be a recipe for trouble.
So it is reassuring that Bank of Canada Governor David Dodge is paying close attention to this trend. “One worries about the structure of the mortgage market, that we may be actually aiding, facilitating a rise in the price of real estate that is really not warranted,” he told journalists in Vancouver this week. While he expects real estate prices to escalate in areas of fast economic growth, he said, he is deeply concerned about real estate prices outside those areas, some of which are rising twice as fast as the inflation rate. “We’ll worry about that, and we’ll continue to worry about that.”
Buyers have been crowding into the real estate market in near-record numbers. New home prices were up 15.7% on an annual basis in Winnipeg last July, and 6.8% in Halifax. Although the number of monthly sales of resale homes declined slightly last month, the Canadian Real Estate Association expects the resale market will remain strong for the rest of the year. Financial institutions are dangling good mortgage rates with long-term repayment plans. Even the once-staid Canada Mortgage and Housing Corporation drew Mr. Dodge’s criticism last year with its astonishing offer to insure interest-only mortgages.
The Governor’s concern about real estate prices is part of a deeper worry. Central banks did not understand the magnitude of the easy money available through sophisticated securities and, as a result, kept interest rates too low. Since the recent meltdown in the U.S. subprime mortgage market, credit has been tightening. But what will happen if homeowners face higher interest rates when they renew their mortgages? What if the number of new buyers shrinks in response to higher rates, especially in markets of lower economic growth? So many people have their futures pinned to the increasing value of their house over time. Mr. Dodge is right to pay close attention to what could be a perilously overpriced real estate marketplace.
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