Canada's hot housing market isn't in bubble territory, according to a new report which argues that it's the federal government's "dangerous" tightening of mortgage rules that poses the biggest threat to home prices.
That view, from housing market economist Will Dunning, runs contrary to many readings of Canada's housing sector.
Many analysts have examined the state of housing in this country and declared it overheated, overvalued, and ripe for a tumble in prices as soon as interest rates begin to rise.
Nonsense, says Dunning, who runs a real estate market research firm and frequently consults for the mortgage industry.
For one thing, he dismisses some of the data that groups like the OECD have used to justify their diagnosis of a housing bubble as "badly flawed."
The OECD report found that based on the ratio of house prices to rents, Canadian real estate is overvalued by as much as 60%. But Dunning says the particular house-price-to-rent ratio used is inaccurate because it overestimates house price growth and underestimates the pace of rent increases.
Looking at house prices, Dunning says there is room to accommodate a sizable increase in house prices of as much as 25% over the next two years, along with a rise in interest rates of as much as one percentage point from current levels.
Dunning instead argues that it is Finance Minister Jim Flaherty who has created "dangerous" conditions for the housing market by tightening mortgage rules on four separate occasions.
He says the most recent change, to eliminate 30-year amortizations for insured mortgages, "took demand out of a housing market that was already in a state of balance." He likened the effect of that one rule change to a one percentage point increase in mortgage rates.
Dunning's report comes as a closely-watched indicator showed Canadian housing prices hitting a record high. The Teranet-National Bank composite price index rose 0.3% month-over-month in February, led by gains in Western Canada.
Over the last 12 months, the index has increased by 5% nationally. Prices in Calgary rose 9.6% year-over-year and in Vancouver by 7.7%. Toronto prices were up 6.1%
But some markets saw year-over-year drops. Prices in Victoria fell 3.4%, Halifax dropped 4.7% and Ottawa-Gatineau slipped 0.6%.
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