Boom has roots
Eric Beauchesne
Province
OTTAWA — The odds of a housing-price correction are rising, a major bank is warning.
However, chances that the current seven-year boom will turn to a bust are still low because, while it has run longer than most, the 40-per-cent increase in prices is not excessive by historical standards, the run-up in interest rates has been relatively modest and unemployment is low, Scotiabank said in a report yesterday.
“From a historical perspective, the duration of the current upswing in home prices is relatively long,” said Scotia economist Adrienne Warren, noting that over the past 50 years there have been three other major housing booms, each lasting five to six years.
“The magnitude of the current price gain, however, is not out of the ordinary, with the rise in real home prices essentially in line with the average 44-per-cent increase recorded over the prior three cycles.”
Housing prices still appear to be well supported by economic fundamentals, being driven by tight supply-demand conditions, not investor speculation, the report said. In contrast, during the 1985-89 housing boom, which went bust, price increases were much larger than would otherwise be expected, given overall market fundamentals.
The current housing boom is also more diverse regionally than previous ones, especially the 1980s boom, when average home prices were driven up by a spectacular — albeit unsustainable — 84-per-cent inflation-adjusted surge in Ontario, Warren said. In the current cycle, all regions of the country are contributing to the rise in average house prices, and no province has yet experienced an after-inflation appreciation in excess of 60 per cent.
The current low and stable inflation environment is also reducing the risk of a large price correction, the report said, noting that in only seven of the past 50 years has there been an actual drop in housing prices.
Any drop in inflation-adjusted prices this time will likely occur through a gradual erosion by inflation, rather than a drop in actual prices, it said.
© The Vancouver Province 2006
