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Despite Fears of Canada’s Housing Market Overheating, House Prices Continue to Rise

Market observers are pointing to alarming trends that are stoking fears of Canada’s housing market entering a bubble in the near future.

Among the main factors inflaming the Canadian residential real estate segment is runaway price growth, particularly in crucial hubs like Toronto, Vancouver, Ottawa, and Montreal.

Charles St-Arnaud, chief economist at Alberta Central and former Bank of Canada economist, said that the overheated activity in these markets – which collectively account for some 50% of the national population – might force the central bank to make “extremely careful” adjustments to interest rates should the need arise.

This cautious approach will be necessary since the historically low rates are conducive to better affordability, St-Arnaud explained.

“The housing market will probably be the first casualty of higher rates,” St-Arnaud said. “When rates go up, that affordability will disappear very, very quickly.”

Even something as small as a 25-basis-point hike “will have more impact than we’ve seen over the past 20, 30 years,” the economist added.

Royce Mendes, senior economist at CIBC Capital Markets, argued that Canadians’ savings built up over the pandemic year – hailed as a potential lifeline of the nation’s recovery once the economy fully restarts – will likely impel significantly increased spending in housing over the next decade.

This consumer activity could end up making the case for a rate higher than the pre-pandemic level.

“All that money has to eventually go somewhere,” Mendes told Reuters. “It is not just going to sit in the bank accounts of households for decades into the future.”

The latest consensus of house prices are forecast to rise 15% on average this year nationally.

“Headlines will probably flag housing market declines in the short term, but don’t let them fool you…this market is still extremely strong across geography and segment. Even if we’ve likely seen peak momentum its still a long way back from the moon” noted Robert Kavcic, senior economist at BMO Capital Markets.

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