realtylinkonline

Breaking the bubble myth: Three expert opinions

Some homebuyers may wonder if home prices are rising too quickly and a price bubble is developing. A bubble is a period where prices rise excessively in a short time period. What is the forecast for home prices?

Since low mortgage rates are the main driver behind the current market upswing, what happens to interest rates is the key to answering this question.

Interest rates have been cut twice to 2.75 per cent from 3.25 per cent in the past three months. What do these cuts mean for the Greater Vancouver housing market? Will they contribute to a bubble? To find out, we asked three experts.

Kate Mancer, Economist, Principle, Lumina Research Inc., says that while there's no question low mortgage interest rates have helped the housing market, the latest cuts won’t significantly impact the market.

Instead, Mancer thinks the market is making up for years of decline and still has a long way to go. "There’s absolutely no case of a bubble to be made at all. Despite low population growth the market has been buoyant and will continue to perk along." Mancer points to Statistics Canada’s New Housing Price Index. "It declined in the 1990s and has now started to reverse." Mancer also sees the recent Olympic 2010 bid win as good news. "People are feeling confident and there’s no reason for the market to change."

Helmut Pastrick, Chief Economist, Central Credit Union, says the rate cuts have impacted those with variable rate mortgages, who are seeing a net gain, although the cuts didn’t impact anyone locked in.

Is our local market in a bubble? Pastrick says not at all. "Speculators haven’t been driving the market. First-timers and existing owners buying principal residences have been driving the market. " Pastrick also sees plenty of potential buyers still on the sidelines. "We haven’t tapped out pent-up demand. More renters will opt for ownership housing."

Pastrick thinks the market may possibly take a breather in 2004-2005. "There are price cycles and at some point prices will contract. But, on the whole, I’m very positive that the market will continue to perform well."

Andrew Ramlo, Demographer, Urban Futures Institute, says that while further rate cuts are not expected in Canada or south of the border in the near future as the US and Canadian economies pick up steam, the current low-interest rate environment bodes well for continued buoyancy in real estate markets.

"We have come through a point in time where, due to low interest rates, a significant number of new homeowners have entered the real-estate market. In addition, it’s also allowed many existing owners to trade up or even purchase investment properties," says Ramlo. "The degree to which the recent flurry of market activity in the Lower Mainland will be maintained will be predicated on our fundamental ability to advance real wages and see real income growth, and to attract a sustained flow of net migrants to the province."