Canada's housing market is looking increasingly like a bubble in the making, Edward Jones said today in a report.
“Canada’s housing market escaped the recent severe downturns in the U.S. and other countries. However, today’s conditions in Canada share some characteristics of those countries prior to their downturns, leading us to take a cautious stance on housing investments,” wrote analysts Kate Warne and Craig Fehr, adding that Canadians should prepare for “the possible impact” of a housing downturn.
An asset bubble forms when cheap money causes speculators to flood into a market, driving prices higher despite weak underlying fundamentals. With unemployment high and the economic recovery on shaky ground, the rapid recovery of Canada's real estate market has many economists concerned that prices could head lower. Prices have gained almost 20 per cent in the last year, as a lack of inventory and easy access to cheap money has propelled Canadians toward home ownership.
The analysts said three factors must be in place for a bubble to form – prices that are too high compared to historical averages, easy credit, and lax government policy that allow people to get in over their heads. Last month the federal government made it more difficult to obtain a mortgage, requiring all borrowers to qualify at the five-year rate when applying for credit rather than the variable rate, which can be much lower.
“We think the first two conditions characterize the current Canadian housing market,” the report states. “To avoid the third condition, the government is taking steps to tighten mortgage availability, and regulation remains relatively tight. While we believe any housing downturn in Canada won’t be as severe as the recent U.S. experience, the increasing likelihood of a cooling housing market still poses some risks for investors who are not well-diversified.”
While the economy has shown signs of strength, the analysts suggest the pace of recovery in the housing market has been too high to be sustainable.
