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For the last few years, the question of a housing bubble in Canada has constantly been in the news. Everyone from local, provincial and federal government officials to independent regulators to financial institutions continue to speculate that the market is too hot and that measures need to be taken to cool it.

The term housing bubble itself is a controversial term as it implies that there are no fundamentals in the housing market that support sky-rocketing house prices. Is this the case in Canada?

I guess we have to look at why the housing market is so hot. Of course, supply and demand are a major issue, but the root cause fueling demand relates more to strong employment rates, slow inflation and extremely low interest rates.

The reality is that, because supply and demand have driven home prices up so high, affordable housing is harder to come by for the average family, leading buyers to have to finance larger mortgages than ever before. It’s almost impossible to argue that, if mortgage rates increase, which they eventually will, it won’t impact the housing market. How will people be able to afford those much larger mortgage payments upon renewal?

A very interesting point regarding this was covered in a recent article from CBC. Bank of Canada governor Stephen Poloz attributed the hot Toronto housing market to being a symptom of a rapidly growing economy when compared to other parts of the country. With that said, he was quoted as having some specific concerns about how people will be able to service mortgage debt, both at today’s interest rates and in the event that rates rise in the future. Read more on this here:

Another interesting read in the CBC compared the current housing market to the bubble that burst in the late 1980s. In the late 80s, interest rates were much higher, rules were far less strict in relation to qualifying for a mortgage, and there was an overabundance of new development. This was not to mention that, where Ontario was concerned, we were about to hit a recession. These are not the conditions that we are seeing today:

In the article, Sherry Cooper, chief economist for Dominion Lending Centers, spoke to the current fundamentals we are seeing in one of the hottest markets in Canada – Toronto: “We are not seeing a situation where households are so overextended that they’re going to walk away from their homes.”

The experts remain divided as to whether or not what we are seeing has the potential to result in a housing bubble, but there seems to be a general consensus that rapidly rising prices in urban hotbeds like the GTA continue to be a concern.

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