What Bubble?

There is no housing bubble, and any misguided attempts to fix one will cause bigger problems in the long run.

That's one of the main takeaways of a new report from Mortgage Professionals Canada, an industry group that represents 11,000 mortgage brokers across the country.

"Housing bubbles do not exist in Canada," the group's chief economist Will Dunning says in the report, adding that it would be "tragic" if any misguided attempts to fix a problem that doesn't exist were to happen.

The report cites U.S. economist Joseph Stiglitz as saying a key requirement of bubbles is that the price of something is "high today only because investors believe that the selling price will be high tomorrow."

? David Donnelly/CBC Real Estate signToronto, Ontario, CRD June 16, 2016, (David Donnelly/CBC)

In other words, a bubble occurs when people buy something solely because prices are rising quickly and they deduce that they will continue to do so.

Unlike other purely financial assets, which people primarily buy because they plan to sell them for a higher amount later, housing is different, because people's main motivation to buy is often to live in it.

That is why Dunning doesn't buy the housing bubble thesis. He says there are reams of evidence that suggest housing price appreciation is solidly backed by fundamentals — people want to buy houses because they want to live in them.

"Price growth in Canada, even in Vancouver and Toronto, is still consistent with the economic fundamental of interest rates and affordability," the report says.

In its recent Monetary Policy Report, no less than the Bank of Canada noted that it is on the lookout for "self-reinforcing price expectations" in the housing market.

As far as Dunning is concerned, however, there's little to worry about in the numbers, because he notes that while mortgage debt is increasing, with rates so low the amount of mortgage payments that go to paying down the principal versus interest payments is near record highs. 

Still, group isn't without some concern about the housing market. On the subject of foreign buyers, the report does concede that there's at least anecdotal evidence that moneyed foreign buyers are driving up prices in Toronto and Vancouver, especially in the market for high-end homes.

As evidence, the group notes that in both cities the "rates of price increase are now much higher for single-detached homes than they are for lower-priced townhomes and condominiums. In other centres covered by the CREA index, that pattern is absent."

"This is consistent with increased buying by affluent foreign investors, although it is not conclusive proof," Dunning says.

"We should accept that foreign buying is very substantial in Vancouver and that the Vancouver housing market is being severely distorted in consequence," the report said. 

"In Toronto, we do not have the same amount of anecdotal evidence, but the recent great strength in the market and an acceleration of price growth have led to suggestions that a similar set of effects may now be developing."

Lawmakers in Ottawa are currently attempting a so-called "deep dive" for more information on the housing market, something that MPC supports, but cautions against drawing the wrong conclusions from the data based on misperceptions of a problem.

One of the factors being discussed would be an increase to down payment requirements, something that critics say would push house prices further out of reach for first time buyers while doing little to deter speculators.

"A much greater risk to the housing market would be policy changes by mortgage insurers or mortgage lenders that make it harder to finance home purchase," the report says.

"Now that the energy sector is no longer a major economic driver, a healthy housing sector is even more essential …. It would be tragic to unnecessarily impair this key economic force."