Feb 2010 10

Bubble or Babble?

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Price tags on homes in Canada jumped 19 per cent in December from a year earlier and housing prices are on pace to climb another 5.4 per cent to a new all-time record this year, according to the latest figures from the Canadian Real Estate Association.

Affordability could soon be out of reach for many as the price of the average home in Canada is on track to reach $337,500 by year’s end before easing again in 2011.

But steep prices aren’t the only factor in a bubble-forming. So how can we spot the threat?

According to real estate economics expert Gilles Duranton there is no foolproof crystal ball. Like any other investment asset, house prices are a reflection of what the market is willing to pay at a given time. They’re based on predictions of what a particular property could be worth in the future, Duranton said.

In most cases, prices are somewhat justifiable, therefore price tags alone cannot signal the onset of a bubble.

“Individual markets are all on the way up at the moment,” Duranton said, pointing to Canada’s major metropolitan areas, including Vancouver, Calgary, Toronto and Montreal. “It’s quite unusual historically and certainly not the norm.”

The Bank of Canada meanwhile has downplayed talks of a bubble thus far, but has said it’s watching home prices closely. The central bank has said it will hold its lending rate at historic lows of 0.25% until at least June.  

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