Not a bubble, just vulnerable: Carney - MoneySense

Not a bubble, just vulnerable: Carney

Residential construction and renovation are at peak levels while cheap credit is driving housing prices up. This could be recipe for a bubble burst, but Mark Carney is only warning, not predicting.


Back to the Bank of Canada’s Mark Carney and his speech in Vancouver last week.

While the director avoided the use of the word bubble he did describe Canada’s housing market as financially vulnerable. This is in part because of the high monthly cost of owning versus renting.

In his speech, Carney states: “…the ratio between the all-in monthly costs of owning a home and renting a home, as measured in the CPI, is close to its highest level since…1949.” This increase in costs puts the proportion of Canadian households that would be severely adversely affected by rising costs at the highest level in nine years. This, said Carney, “despite improving economic conditions and the ongoing low level of interest rates.”

At present, the average national house price is four-and-a-half times the average household disposable income. Yet, explains Carney, in the last quarter of a century this average ratio hovered around three-and-a-half times average disposable income.

For those in the market for condominiums, Carney warned of a potential collapse in pricing in major urban centres due to high supply and high investor demand (which can be fickle and damaging in the long run).

For those interested in single family homes, Carney warned that the cheap credit — that’s making it so easy to get into the market — is also driving up bid prices for Canadian homes.

Carney also pointed out that residential investment — which includes new home construction and renovations — has consistently exceeded the long-term average share of the overall economic activity for more than seven years. He also mentioned that the current levels of residential investment are now at levels that were previously considered peaks in the Canadian housing market.