In the report, MPC chief economist Will Dunning says proof of a bubble requires expectations of price growth that are self-fulfilling and prices diverge significantly from what should be expected based on economic fundamentals.
While there’s no evidence of a speculative mindset in Canada’s housing market, he does note that there’s evidence of a moderate effect in British Columbia but the effect isn’t as strong as what happened in the United States during its bubble period.
Dunning adds that very low interest rates have created “affordability space” in which home prices could rise and that the “rapid rises of housing prices are consistent with economic fundamentals.”
He believes mortgage policy changes would lead to an unnecessary drop in housing demand and housing prices. Last week, the federal government announced it would establish a working group to study to monitor the housing market and provide policy recommendations.
The report also notes that there isn’t any evidence of borrowers or lenders taking on excessive risk because:
- There’s a low rate of mortgage arrears (0.28%), according to the Canadian Bankers Association;
- Homeowners are able to pay down the principal on their mortgages faster due to low interest rates; and
- Changes in housing prices are fully respective of interest rates and borrowers’ ability to pay and rising housing prices don’t automatically equate to increased risk.
Dunning says a strong housing market has been good for the Canadian economy and it would be “tragic to unnecessarily impair this key economic driver.”
“From our perspective,” he writes, “the greatest risk to the housing market (and consequently to the broader economy) is not reckless consumers or lenders—it is needless policy changes.”
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Flickr: Robert Jack Will