Canada’s Flaherty Says There Is No Housing Bubble ‘Right Now’

Finance Minister Jim Flaherty said record Canadian home prices partly reflect a stabilizing economy and don’t constitute a bubble “right now,” even though the government is prepared to act if gains become excessive.

Flaherty, in an interview today, said recent price increases for homes in Canada are due to a “confluence” of factors including low interest rates, an improving economic outlook and a stabilizing job market.

“We always watch the housing market to make sure that we do not see the development of an asset bubble,” Flaherty, 59, said during an interview in his office in Ottawa. “There would have to be clear evidence of an asset bubble in residential real estate in Canada, which there is not right now,” for the government to take steps.

The lowest mortgage rates since the Korean War have helped fuel a 67 percent jump in existing home sales in November from their January low, with the average price up 19 percent from a year ago to C$337,231 ($317,335), according to data from the Canadian Real Estate Association.

Bank of Canada policy makers Dec. 10 cautioned that rising debt levels will make Canadian households more vulnerable when interest rates rise. Households have kept adding debt this year while other countries such as the U.S. and U.K. have seen reductions in debt-to-income ratios, leaving more Canadians at risk when interest rates rise, the Bank of Canada’s report said.

Encouraging Signs

Economists, including David Laidler of the C.D. Howe Institute and David Rosenberg of Gluskin Sheff & Associates Inc., have said the house-price gains signal a bubble may be forming in that market.

“There are very low interest rates of course, the Canadian economy is showing signs of recovering, although it has not yet recovered, the job market has stabilized, so there are some encouraging signs for Canadians,” Flaherty said.

Canada last year tightened mortgages rules. Home loans insured by the government through the Canada Mortgage and Housing Corporation were limited to a maximum term of 35 years and required a minimum down payment of 5 percent, up from zero.

Were the government to eventually consider new measures for the housing market, they would likely be similar to the changes implemented in 2008, Flaherty said today.

“What we have done before can be done again,” Flaherty said.

Source: Bloomberg

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