Canada?s housing market is beginning to show signs of a bubble, investment firm Edward Jones said in a report released Tuesday and cautions Canadians about investing in housing.
Canada exhibits at least two of three characteristics common to asset bubbles. The three conditions of a bubble are, according to the report, overvalued house prices, easily obtainable credit and lax regulation and we can already see prices that have risen too fast and credit that is easy to obtain.
An asset bubble forms when cheap money draws in possible buyers that flood the market and drive prices higher. 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.
The average resale price of a home rose 19.3% in 2009 to $337.410, according to the Canadian Real Estate Association. This average home price is five times the average after-tax income, compared to the long-time average of 3.7 times.
Meanwhile, mortgage rates are at new lows. This poses a risk to consumer spending as a greater number of variable and short-term mortgage holders deal with rising rates in the next few months. A 3% increase in mortgage rates (on a $87-billion pool of short-term mortgages originating between 2007 and 2009) means mortgage payments for these borrowers could jump by an average of $444 per month for a mortgage of $254,514 and would result in an estimated $1.8 billion reduction in annual consumer spending. Before the new regulations came into effect last week, many mortgages required only 5 per cent down and were amortized as high as 40 years, rather than the traditional 25 years.
The investment house advises investors concerned about the market to avoid investing more money in housing and to reduce their exposure to bank stocks.