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Housing bubble definition inconclusive: report

Monday, March 9, 2015

A new report from Fortress Real Developments (Fortress) revealed that two-thirds of market experts agree that a major housing correction is not in the cards for Canadians over the next five years. In fact, the report, which sourced data from a variety of professional resources, said that analysts could not agree when it came to defining a “housing bubble.” Therefore, speculation surrounding a national housing crash should be considered, but not without skepticism.

According Ben Myers, Senior Vice President of Market Research at Fortress, and author of the Market Manuscript, 44 per cent of the analysts he interviewed believed a housing bubble could not be determined based solely on increasing housing prices. This is partially because there was no single consensus on what annual price inflation would warrant the definition.

When asked the question “At what level of annual house price growth would you determine that Canada is in a bubble?” market analysts answered:

  • 20 per cent to 30 per cent annual growth in average prices (25 per cent of respondents);
  • 10 per cent to 19.9 per cent annual growth in average prices (25 per cent of respondents);
  • Five per cent to 9.9 per cent annual growth in average prices (six per cent of respondents); and
  • None of the above, as other factors must be considered (44 per cent of respondents).

Despite ongoing concerns regarding overbuilding, particularly in major Canadian cities, the report found that new construction is relatively in line with historical averages. The Bank of Canada, for instance, reports that housing starts are meeting demographic demand. The Greater Toronto Area, where housing prices continue to soar and many analysts suggest overbuilding, is actually experiencing a lack of supply, particularly in the detached housing sector, the report states.

In a November analysis from RBC Global Asset Management, one of the sources used for the Market Manuscript, a total of 200,000 new annual housing starts are required to keep up with demographic demand. Forecasts from various sources, including Altus Group, TD Economics, and BMO Capital Markets, all indicate that housing starts will not meet that benchmark in 2015.

To learn more, download the Market Manuscript here.

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