While the Canadian economy has performed admirably since the 2008 US mortgage crisis, and the subsequent worldwide recession, there is growing concern for the unabated increase in Canadian real estate prices. There are two very different camps looking at the Canadian real estate sector with many believing that low interest rates make it more affordable than ever while others are concerned about overheating and potential financial distress for homeowners. So, what did Julie Dickson, head of the Office of the Superintendent of Financial Institutions (OSFI), have to say about the situation?
When you bear in mind that this is one of the leading financial institutions in Canada you might expect the OSFI to offer some guidance?
Confusion and denial
While Julie Dickson suggested that the Canadian real estate market “bears very close watching” she was unwilling to confirm or deny whether she believes the property sector in Canada is headed for a price bubble. When you compare this strategy with that of the Bank of England and other major regulators around the world it is a little strange that somebody who is looked up to by the financial sector in Canada is unwilling or unable to give a firm view.
Quote from PropertyForum.com : “Despite the fact that Canada is attracting more than its fair share of real estate investors, both domestic and international, you may be astounded to learn that there is no public data available on investment ownership of Canadian real estate.”
While we can understand the situation, if Julie Dickenson says the sector is overvalued then it will spook investors and if she suggests it is fair value then investors will continue to pile into the real estate market. In many ways she is in a no-win situation but surely we should expect more guidance from one of the leading lights in the Canadian financial world?
Is the Canadian property market overvalued?
There is no doubt that demand for Canadian real estate continues to rise, prices are reflecting this demand and there are concerns in some areas of the country about a potential house price bubble. These concerns have been around for some months now and the authorities are known to be watching the situation very closely. Those who believe the sector is well balanced are looking at the situation in light of relatively low interest rates but what will happen as and when interest rates rise?
If the Canadian property sector continues to rise then at some point we will see interest rates recover and move towards their more natural level. This will immediately increase mortgage payments for millions of people across Canada and for those who bought at the top of the market there is a distinct danger of potential negative equity in the short term.
Without any firm guidance from the likes of Julie Dickson it seems unlikely that the ongoing demand for Canadian real estate will abate. This is an area of the world which has enjoyed relative economic success through recent worldwide troubles and a government which has managed the economy to almost perfection. The Canadian authorities brought in austerity measures before anybody else, they stood by their word and in many ways they are being rewarded by the economic success visible today. However, when will they need to put the brakes on the Canadian real estate market?