Canadian Average Housing Price Sets New Record

In “Housing Rebound in Canada Spurs Talk of a New Bubble” the WSJ paints a familiar picture of what can happen to an asset market when interest rates drop to extremely low levels. Although Canada never experienced a housing crash like that of the U.S., the Bank of Canada still dropped rates to near-zero to help support the domestic economy. Its efforts to support exports (primarily to the U.S.) have been thwarted for much of the past year given the sharp rise in the Canadian dollar.

Here are some highlights from the article that describe the frenetic pace of the current Canadian housing market:

  • The average home price rose 23% from the trough in January, 2009, hitting a record according to one broad measure.
  • Home-sales volumes are up 70% since January, 2009.
  • Housing starts in December reached levels last seen October 2008 (no indication whether these stats were seasonally adjusted).
  • “Household debt—largely mortgages—was 1.42 times disposable income during the second quarter of 2009, a record high.”

The response of the Bank of Canada speaks to the trap facing policymakers as they contemplate transitioning monetary away from extremely accomodative levels. The WSJ reports:

“…Canada’s central bankers appear reluctant to take any steps that would hurt the economy. In a Jan. 11 speech, a representative of the Bank of Canada said: ‘If the Bank were to raise interest rates to cool the housing market now…we would, in essence, be dousing the entire Canadian economy with cold water, just as it emerges from recession.'”

The Canadians avoided the worst of the recent global meltdown. Let’s hope they did not avoid the fire only to land in the frying pan.

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