The Canadian Press

Accelerated activity in the housing market is part of the natural flow of economic recovery, according to the Bank of Canada and housing economists working to deflate theories about a new housing bubble that could drive the Canadian economy back into recession.

The Bank of Canada indicated it was premature to be talking about a housing bubble in Canada in a speech delivered Monday by bank official David Wolfday. His remarks came after months of highlighting the danger of Canadians getting in over their heads in purchasing homes.

“Recent house price increases do not appear to be out of line with the underlying supply/demand fundamentals,” Wolf said. “We see the housing market requiring vigilance, not alarm.”

Wolf said the bank considers the current hot market to be a phenomenon based on temporary factors, such as pent-up demand from the recession, and low mortgage rates.

Moreover, he noted that with starts below long-term demographic requirements, the number of houses on the market is still declining.

The Canadian Real Estate Association reports housing prices increased about 4.4% over the first 11 months of 2009, and predicts a further increase of 4.7% in 2010.

The association’s chief economist, Gregory Klump, said the year-over-year increase has been “turbocharged” by a combination of today’s strong market and the weak year-ago market, which skews average prices.

He added that the current increase is part of natural real estate cycle.

“One would expect that when the worst of a recession is behind us and we’ve got emergency low interest rates, that would draw buyers back to the market,” he said. “A lot of the supply that moved to the sidelines is coming back to the market and is expected to continue to come back, making for a balanced market and smaller price increases going forward.”

Bank of Canada governor Mark Carney has warned for months that Canadians are amassing too much consumer and mortgage debt and that could be a problem for the broader economic recovery if rates rise and debt payments begin to increase for millions of Canadian households.

The Bank of Canada has said interest rates will probably rise after the middle of the year as the economic recovery takes hold and the impact of stimulus spending creates potential inflationary pressures in the economy. However, Monday’s comments suggest the central bank won’t push rates higher just to cool the housing market.

“We would, in essence, be dousing the entire Canadian economy with cold water, just as it emerges from recession,” Wolf said in an Edmonton speech delivered on behalf of deputy governor Timothy Lane, who could not travel to the Alberta capital for personal reasons.

“As a result, it would take longer for economic growth to return to potential and for inflation to get back to target,” he added.

Finance Minister Jim Flaherty has also openly discussed policy measures to cool the housing market, including raising the minimum down payment requirement above 5%, or reducing the maximum length a residential mortgage can be amortized from the current 35 years.

Monday’s speech came hours after Canada Mortgage and Housing Corp. released a report indicating the annual rate of housing starts reached 174,500 units in December, up nearly 10,000 from November.

The organization said the improvement in housing starts was broad-based, with solid increases in both single and multiple starts to end the year.

Klump said the rise in new supply in market as well as increase in resale market will let some of the air out of tires in the balance between supply and demand, adding that as 2010 progresses price increases will shrink to the rate of inflation.

Wolf said that even if the bank judged that housing prices were getting out of hand, raising interest rates is too blunt an instrument since it would have the effect of cooling off the entire economy.

Statistics Canada also released figures Monday that pointed toward growth in the housing sector, showing construction intentions in the residential sector are starting to approach their pre-downturn levels, rising 9.1% in November to $3.8 billion.

Contractors took out $5.9 billion in building permits in November, down 4.6% from October.

But Statistics Canada reports that they were 23.1% higher than November 2008 and 62.8% above February 2009, when their value bottomed out amid the economic downturn.

Klump said the current hot market is unlikely to cause a bubble because the economy is on an upward swing, reducing the probability of a massive decline in housing demand.

@page_break@“I don’t see where the catalyst is going to come from for some kind of massive decline or popping of any quote unquote bubble,” he said.