Sizzling house prices invoke bubble spectre
Memories of 1989-90: But this time, there's no inflation to fuel speculative buying, analysts say
Jacqueline Thorpe
Financial Post
The North American housing market has become so hot that fears are growing that it may all end in tears, like the painful 1989-90 property crash.
In a tongue-in-cheek poke at how expensive the U.S. residential market has become, John Lonski, chief economist at Moody's Investors Service, said in a recent report that an "Archie Bunker"-style house in Queens, N.Y., was reportedly sold for a sky-high US$309,000.
"If my source is correct, this is one of the more incredible bits of economic news I've come across in some time," Mr. Lonski said.
Evidence of a sizzling housing market continues to build. Statistics Canada reported yesterday the value of building permits issued surged 17.4% in January over January, 2001, blasting past economists expectations for a 2.5% gain. Permits for housing construction alone were up 24.9%, the best monthly performance since January, 1990.
House prices are also on the move. Average existing home prices jumped 9.6% in Canada in January over the year before, while some neighbourhoods in Toronto have seen double-digit gains. Existing home sales in the United States have risen 8% in each of the past two years.
"[It] would be nothing less than cavalier to dismiss the possibility of the emergence of a speculative bubble in the area of residential real estate," Mr. Lonski said.
The U.S. housing market has remained strong despite the loss of 1.45 million jobs since March, 2001. Mr. Lonski said he dreads to think what might happen to inflation risks if the job and equity market bounced back at the same time and house prices continued to rally over an extended period.
Analysts are more sanguine over the Canadian market.
Stéfane Marion, senior economist at National Bank in Montreal, said while the prices of existing homes sold have shot through the roof, the new housing price index has seen annual gains of only 2.3% over the past two or three years. During the late 1980s, the index registered gains of 15%, before slumping 10% from 1990 to 1991.
Meanwhile, actual Canadian housing starts are still about 15% off the peak of 1990.
The entire nature of the housing market is different than it was in the late 1980s, economists say. Back then, roaring inflation fuelled a surge in speculative buying, but now that interest rates are sitting at 40-year lows, and inflation is defeated, much of that destructive leverage is gone from the market.
"In 1989 there was a lot of buying and flipping properties for speculative purposes," Avery Shenfeld, senior economist at CIBC World Markets said. "This is more real people buying real houses to live in."
Demand, driven by those ultra-low interest rates and a relatively buoyant labour market, remains strong. Supply is historically low.
"During much of the 1990s we really underperformed what the demographic demands were for housing and I think some of that now is payback," said Rick Eggleton, deputy chief economist at Bank of Montreal.
Rising interest rates may take the froth off the market but with the economy on the upswing, analysts do not expect any significant pull-back. With most investors suffering stinging stock market losses and getting only meagre returns from bonds, real estate is also being viewed as a viable asset class again.
"People probably are a little more nervous and are looking at things that are at least perceived to be a little less volatile and more secure," said Adrienne Warren, senior economist at Bank of Nova Scotia.
jthorpe@nationalpost.com |
