Talking in circles about housing bubbles
Despite the Federal government's recent tweak to Canada's mortgage rules – and its insistence that the move was precautionary, not reactionary – talk of a Canadian housing bubble 
continues to swirl.
But, really, it's impossible to know whether these rumours have legs, or whether they're creating unnecessary fear. As the Globe and Mail reports:
Economists have yet to devise an accepted scientific means of measuring [bubbles], comparing them or calculating the crucial role played by human behaviour in their creation and collapse."People seem to see a bubble everywhere they turn. It actually takes a long time to develop a major bubble," says Harold Vogel, author of Financial Market Bubbles and Crashes.
The availability of cheap and easy credit – injected into the economy somewhat artificially by the government – is one factor that has historically fuelled bubbles. As this 2005 article in BusinessWeek reveals, however, it takes a little more than that.
Judging by one of the article's more "pessimistic" responses (that turned out to be rather accurate), an influx of "greater fool" investors – those speculative investors that hop on the bandwagon after the train has already left the station – are the primary symptom of a bubble.
They drive up prices, causing "real" buyers to panic and purchase homes they can't really afford. Once the number of new 'real' buyers tapers off – either due to a rise in interest rates, increased job losses, or a simple drying up of the number of 'real' buyers out there - the speculators panic, worried that they won't be able to flip their new property, and a massive sell-off ensues.
Understanding this, it's probably a good thing that the government made life increasingly difficult for these speculative investors by increasing the minimum down payment required to purchase a rental property. Now, instead of merely putting a painless 5% down, investors are required to have a little more skin in the game – 20%.
So the question remains: was this in fact a precautionary measure on the part of the government, or are there already a bubble-worthy level of speculators in the market? And how many homebuyers, over the last year, felt the heat of the current market and purchased a property without fully being able to afford it?
Unfortunately, it's difficult to determine how many speculators are in the market. According to this article in the Globe, however, it's possible that the 2008 stock market crash has caused many inexperienced investors to turn their sights on real estate - their goal being to put as little money down as possible, and employ less due diligence than your typical seasoned investor.
On the other hand, the other subset of risky buyers – 'real' buyers who have stretched themselves too thin, worried that they'll be priced out of the market – is negligible, according to this report by the Canadian Association of Accredited Mortgage Professionals (CAAMP). The report reveals that 80% of Canadian homeowners who took out a mortgage in 2009 opted for fixed rate mortgages, and 70% of those mortgage holders opted for terms of 5 years or more.While it's true that some homeowners are stretching themselves thin, CAAMP estimates this number makes up 0.05% of all Canadian households.
So where does that leave us? Back where we started, it would seem. If we are, in fact, in a housing bubble, it seems we won't know until after it pops.
