Friday, February 12, 2010

The Making of a Housing Bubble

Bubbles remain hard to define, difficult to measure and, like recessions, can only be accurately assessed after they have burst. Economists have wrestled with bubbles for generations, but have yet to devise an adequate scientific means of analyzing them, comparing them or providing us with an early warning system that would safeguard from their worst effects.
But lately, bubbles – or bubble fears – seem to be everywhere. From Chinese real estate to U.S. Treasury bills to global commodities, analysts point to a flood of easy credit that has helped to inflate values.
Now, soaring prices are triggering bubble fright on the Canadian housing front.
For much of the global downturn and financial crisis – which was triggered by the bursting of the U.S. housing bubble – Canada stood as an island of calm. House prices never reached the stratospheric levels of the subprime era south of the border and their decline was nowhere near as precipitous when the Canadian economy weakened.
Most housing watchers insist Canada is not in a bubble just yet. But they acknowledge there is no precise science that determines exactly when a market shifts from merely heating up to bubbling over.
“If it walks like a duck and quacks like a duck … ” said David Rosenberg, chief economist and strategist with Gluskin Sheff and Associates in Toronto.
Mr. Rosenberg pronounced Canadian housing in a bubble late last year, fuelled by the usual culprits: tight supply, extreme valuation, and dramatic credit expansion.
Mix in easy mortgage conditions luring more people to jump into home ownership – the current national rate of 68.4 per cent stands at an almost 40-year high and a full percentage point above the U.S. level – and you have the recipe for a classic bubble.
“Housing values are anywhere between 15 and 35 per cent above the levels that I would label as being consistent with fundamentals.”
When it comes to housing bubbles, Mr. Rosenberg's opinions carry some weight. He began his career as a housing economist.

CTV News

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