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The Globe and Mail

A hot housing market that almost makes Canada’s look tepid

A host of concerned regulators, finance officials and debt monitors are raising so many alarms about overheated real estate markets in Canada, Asia and Europe that you have to wonder if their main motive is to atone for missing such signals in the months leading up to the Great Financial Crisis.

Then comes the question of whether they can steer helium-filled housing balloons to a gentle landing. And the track record doesn't look promising.

The latest Canadian warning comes from the respected Office of the Superintendent of Financial Institutions. Even as Finance Minister Joe Oliver insists Canadian housing is not in bubble territory, OSFI is preaching caution to banks and other mortgage lenders about near-record household debt-to-income levels and the rising risks of falling house values.

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"Whether you believe or not that housing prices are too high, you do not hear many observers arguing they are low," deputy superintendent Mark Zelmer told a real estate conference. "I would not presume to claim that borrowers are acting irrationally or do not know what they are doing. But by the same token, it is clear that the ability of the household sector as a whole to absorb major shocks is less now than it was a decade ago."

Unlike their more sanguine Canadian counterparts, crystal-ball gazers at foreign investment banks like Deutsche Bank and Goldman Sachs have for some time labelled Canadian real estate as a balloon in search of a sharp instrument. A handful of U.S. hedge funds made big bets on that view last year and came away with the bruises to show that they were a tad premature.

But it doesn't mean the thinking was wrong. When central banks inevitably resume tightening after years of rock-bottom interest rates, bad things are bound to happen to overstretched property markets.

Similar warning flags have been flying everywhere from China, Singapore and Israel to Germany, Switzerland, Norway and Britain, where Bank of England Governor Mark Carney has just slapped limits on the proportion of large mortgages that a bank can write.

"This is the limit of our tolerance," declared Mr. Carney, who flagged Canada's household debt problem early and often when he was running Canadian monetary policy.

There have been similar bubble warnings about another resource-driven economy with low interest rates, hefty household debt levels, soaring prices and lots of Chinese money snapping up overvalued property. That would be Australia, which is home to some of the world's priciest real estate markets. Residential prices in red-hot Sydney have risen about 17 per cent in the past year, making it one of the world's least affordable markets, while the national increase in the first quarter averaged close to 11 per cent annualized.

Moody's Investors Service concludes that Australia, like Canada, appears headed for a correction.

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"After considering supply-side constraints, the influx of foreign capital and the fact that monetary policy is set to remain accommodative for the foreseeable future, the housing market appears to be increasingly likely to get caught up in a positive price-feedback loop and eventually could face a correction."

Simply put, this econospeak means it's about time to get to the high ground, because the flood waters will be rising any time now.

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