Aug 27, 2009

Is the recent surge in housing sales good news or bad news?


This morning on the Bill Good Show, where I was discussing the new CCPA budget brief, Bill asked me whether the recent activity in BC’s housing market is a sign of strong consumer confidence and a budding recovery. After all, real estate is still very expensive in our cities (even if less so than last year) and arguably people would only enter into a sizable mortgage if they are confident that the economy is on its way up or at least that they would keep their jobs.

There is no doubt that price declines and record-low mortgage rates are attracting first-time buyers into the market, making home-ownership affordable for some people who were priced out of the market just a year ago. A number of my former university pals fall into this category and they have recently purchased a home or are in the process of finding one.

Then, there is the pent-up demand from the earlier part of year, when sales were record low.

However, neither of these sources of housing demand is the result of broad-based improvements in consumer confidence. They are also unlikely to produce a sustained housing market recovery. Eventually, these newcomers in the housing market would purchase their homes and the market should cool again. Unless, of course, the recent surge in housing sales is actually another example of Canadians embracing cheap credit, as Paul Vieira suggests in his recent Globe article. He outlines the risks of low interest rates:

But the approach carries great risk — that Mr. Carney keeps rates too low for too long and ignites the type of consumer-driven bubbles that essentially caused the global financial meltdown not so long ago.

“The risk is that we become complacent,” said Andrew Pyle, wealth advisor at ScotiaMcLeod. “Right now, Canadians have a borrowing strategy that does not fit well with the rising rate environment. That, to me, is the most significant risk.”

It’s too early to say whether the speedy recovery in housing sales is the beginning of a new bubble. But if housing sales keep growing in the face of job losses and a weak economy, we should be more than a little worried.