Latest data inflate the bubble debate

OTTAWA - As home prices continue their steady ascent, the volume of debate over the 'too-hot' vs. 'just-about-right' market is also getting turned up.

Politicians and monetary policymakers are warning consumers to tackle their debt loads now, while many analysts argue it is already happening and house prices are still in a healthy range.

Few are suggesting a market crash is imminent, but this week's spate of strong housing data has renewed concerns the market is dangerously close to overheating and heading for a bubble.

The latest salvo came Thursday, with Statistics Canada data showing new home prices climbing 0.3% in March -- the 12th monthly increase in row -- and just above forecasts. When compared to 12 months earlier, prices were up 2.6%.

The biggest gains in March were in the Toronto and Oshawa, Ont., region, where prices were up 0.6% in March -- due to favourable market conditions and increased demand -- and 6.2% higher on the year.

On Monday, StatsCan reported housing-permit values rose 4.7% in March, far above expectations, and following a 7.6% increase the previous month. But it was Tuesday's closely monitored new home construction report that really got tongues wagging.

Canada Mortgage and Housing Corp. said housing starts jumped 14% in April from the month before to 244,900 units. Most of that activity was once again in the frenzied condo sector.

That report "led to more than a few gasps and coffee stains upon release, highlighting just how high the heat has turned up in certain markets," said BMO Capital Markets economist Alex Koustas.

"That being said, the new home price index has been relatively well-behaved, reflecting more balance on a national level."

Yet, some market watchers believe home prices are overvalued by as much as 15%, while others see the gains as moderate.

"The market is still healthy," said Laura Parsons, mortgage specialist at Bank of Montreal. "Vancouver's market is so much different than most of other markets, and in Toronto ... new housing prices are up substantially but it's because of a lot on condo development -- and affordable condos."

As for household debt, Ms. Parsons said, "I've never seen so much discussion around trying to save on costs and paying more attention to their debt load. I think if we really had to cut back on our budget every month to afford a mortgage, I think there's room there."

The Bank of Canada, which has kept its trendsetting interest rate at a near-record low of 1% since September 2010, says household debt remains the biggest threat to the domestic economy.

Household debt to disposable income is running at about 152.9%.

Along with Finance Minister Jim Flaherty, central bank governor Mark Carney has urged consumers not to get in over their heads because rates will eventually start going up.

Last month, Mr. Carney told the House of Commons finance committee that the average home price in Canada is now about 4.75 times people's income, while the historic average is around to 3.5 times income.

He cautioned Canadians to use "prudence and caution" with their family budgets.

However, Benjamin Tal, deputy chief economist at CIBC World Markets, said the debt-to-income ratio "is almost a meaningless number."

It's important to compare "the value of your debt" to your annual income, Mr. Tal said.

"It is the level of debt that is relatively high, but the composition of it is more important than its level."

Mr. Tal also played down concerns of a housing market crash.

"In order to get a crash, you need two drivers." One is a "very significant increase in interest rates," and the other is a troubled sub-prime market, such as in the United States.

Neither is likely to materialize any time soon in Canada, he added. "I believe the slow increase in interest rates will prevent a crash. "The trend is actually moving in the right direction. Namely, you have a situation in which we're slowing....

"Even mortgage credit is rising at its slowest rate since 2002."

Thursday's Statistics Canada report showed new home prices were higher or unchanged in most of 21 of the metropolitan areas tracked by the agency.

Along with the Toronto-Oshawa region, Edmonton and Calgary also contributed to the national price average, rising 0.4% and 0.3%, respectively.

One surprise in the report was a slight weakening in Vancouver, down 0.1% and Victoria, which was off 0.7% in March. Statistics Canada said the easing came as "builders reduced their prices as a result of competitive market conditions."