Mr. Turner's concern is that rising rates will eventually propel the market lower by making houses less affordable. His level of confidence that the boom will last? Zero.
In his book, published in early 2008, Mr. Turner warned that the Canadian housing market was in a bubble just like its U.S. counterpart. After a peak-to-valley decline of almost 14 per cent in Canada's national average price, he's predicting another plunge for home prices that will be triggered in large part by rising interest rates.
“We're now into the housing bubble, Part Two,” said Mr. Turner, a former member of Parliament who now gives financial seminars and promotes his books. “I think this bubble is going to burst later this year. It's going to be short and intense.”
In the near term, though, he sees rising rates being used to get buyers to jump into the market immediately. “People are being told, ‘Your affordability is going down if you don't buy now, you're going to be forever shut out of the market.' It's the eternal siren song of real estate.”
Many economists doubt that the prime rate – the rate banks use as a base to calculate other lending rates – will increase before next spring, but it's a different story with the longer-term rates that influence fixed-rate mortgages. They've already bounced off the lows they hit in the depths of the global financial crisis, and more increases are expected.
Rising rates make houses less affordable, but this can be offset if housing prices are falling and incomes are rising. In many cities, though not all, prices are actually rising. As for income gains, they're constrained by the recession.
Robert Hogue, senior economist at Royal Bank of Canada, said wages are still creeping higher, but many families have been affected by job losses. “Over all, household income has at best increased very slowly, if not kind of stalled for a bit,” he said.
For Mr. Hogue, rising rates and house prices are a threat to a housing market that appears to be stabilizing. But his outlook isn't all negative. When the job market improves, he believes that household income will rise and help make houses more affordable.
“The moment we have the labour market picking up, to me that would be the sign that says we're in the clear now.”
