As house prices continue to rebound, policymakers may need to consider reversing measures that were adopted to promote the accessibility of home ownership in Canada, a new report by Desjardins Economics suggests.

The report on Canada’s residential real estate market, released on Wednesday, says the market remains far from a bubble situation. But the economists warn that the real estate market is approaching a position that is deemed overvalued, and must be monitored closely.

“It is essential to keep a close eye on price trends because the Canadian market could get close to overheating,” the report says.

It explains that house prices have rebounded rapidly since 2008, when the recession caused both sales and prices to drop. The average price of properties has surged 22% since January 2009, thanks to such factors as low mortgage rates and an upturn in consumer confidence.

“Many households that remained on the sidelines during the recession have got their confidence back and are currently inflating sales,” the report says, adding that many Canadians are likely inclined to purchase a home sooner than they otherwise might do, in order to take advantage of low interest rates.

The surge in demand has resulted in a market favourable to sellers: “Clearly, there are currently too many buyers in relation to the number of properties newly put up for sale, creating upward pressure on prices,” the report says.

Higher interest rates are likely to soften demand, but only to a limited extent, the economists say. They point out that by the time rates rise, the private sector will have regained strength, jobs will be more plentiful, and home-buying conditions will continue to be just as favourable. “This still leaves plenty of room for property prices to keep going up,” the report says.

The Desjardins Group economists applaud measures introduced last month by Finance Minister Jim Flaherty to tighten mortgage rules: “They represent a step in the right direction as they will reduce accessibility, especially for households whose financial situation is more precarious,” the report says. “This should not only reduce demand, but make borrowers less vulnerable.”

But the economists urge the government to continue monitoring the market. If the situation worsens, they suggest that policymakers could consider reversing certain measures that were adopted to promote the accessibility of home ownership, such as longer amortization periods and smaller minimum down payments. The maximum amortization period has been cut to 35 years, but this remains fairly lenient, according to the economists.

“Caution is therefore the order of the day, since the goal is to prevent the formation of a bubble in the market, not to curb residential investment too strongly, at the risk of jeopardizing the economic recovery,” the report says.

Quebec’s real estate market “relatively healthier”

A separate Desjardins Economics report released Wednesday assesses the real estate market in Quebec, and finds that the growth in home prices has been more modest in this province. Quebec also experienced a less drastic increase in prices prior to the recession, and as a result, less severe damage during the downturn.

While recent increases in prices have raised concerns about Quebec’s real estate market, the Desjardins Group economists argue that there are no indications of an emerging real estate bubble, nor any likelihood of price declines in the next year or two.

“According to our estimation model, prices are near the value associated with fundamental factors, meaning that the situation in Quebec is relatively healthier than in Canada and in some provinces,” the report says. “The situation in Quebec’s residential sector does not seem to be critical.”

The economists expect residential prices increases of 5.5% this year and 2.5% in 2011 in Quebec.

IE