Resale home prices hit new record
In recent testimony before the Senate Banking Committee, Stephen Poloz, governor of the Bank of Canada, gave an excellent example of how experts can avoid responsibility for facilitating significant overvaluation in Canada's housing sector.
Poloz got headlines by saying that there was no "bubble." However, he then tempered the statement with a slew of qualifying clauses related to "imbalances," "risks," "high household debt" and the possibility of "outside disturbances" -- all of which signal we may be quite near bubble territory.
If residential real estate proves to be significantly overvalued, Poloz will pull out his qualifying remarks as proof that he warned everyone. However, his widely quoted talking point -- denying a bubble exists -- ensures few people actually hear his warnings.
Soft landing, the preferred term
Poloz's remarks mirror those of a wide community of housing sector "experts" whose job, in large part, consists of presenting a positive economic outlook to advance the interests of the organizations they represent.
For example, if housing were to be widely recognized as significantly overvalued, central bankers would be forced to tighten lending conditions. This would slow the economy; and, come election time, the jobs of the politicians who appointed those central bankers would be on the line. In addition, construction firms (even those in hot areas such as Toronto's condo market) and residential real estate agents would be forced to moderate "hard sell" tactics.
That's why, despite the fact that the average price of homes sold via the Canadian Real Estate Association hit a record $391,820 in October, the most severe warnings you will hear from most sector stakeholders relate to a possible "soft landing."
For example Fitch Ratings, which said last week that Canadian housing is now 21 per cent overvalued, refrained from using the B-word. The agency noted that home prices have surged by 130 per cent since 2001 (far faster than income which grew by just 80 per cent), but projected that values will either flatten or decrease during the next five years.
Another interested party, the Canada Mortgage Housing Corporation (which guarantees more loans when home sales increase), forecast that housing starts will continue at a robust pace of about 185,000 units in 2014: This, despite home building having outpaced household formation in recent years.
Depends who you talk to
A good rule of thumb when analyzing Canada's housing sector is to get opinions from respected sources once removed. For instance, The Financial Times of London warned earlier this month that Canadian residential real estate is "perched precariously at its peak." While The Economist magazine repeated notes housing prices are far in overvalued territory in relation to both incomes and rents.
Whether the outsiders or those with skin in the game are closer to the truth remains to be seen.
Peter Diekmeyer is Bankrate.ca's economics columnist. He can be reached at firstname.lastname@example.org