The thing about bubbles is that you can almost always tell when they're about to pop. There's an extra shiny, bright quality to the surface and the edges start to pull up into the middle. And then, it bubbles over.
There's not much question that Canada's residential real estate market has displayed all the classic symptoms of a bubble that's about to burst for some time now. And yet, every time it looks almost certain to burst, it stabilizes and puffs up a little more.
Sure enough, the latest data released from the Canadian Real Estate Association indicates that the resale of existing homes was up by 1.2 per cent in October over September (which posted a 2.5 per cent gain from August levels) and overall, by 8.5 per cent over October 2010.
In a month crammed with bad economic news on every front, Canadian residential real estate went and posted its best performance since January.
Even more remarkably, the strength of the market in Ontario — a province that has been ravaged by its battered manufacturing sector and a jobless rate that climbed to 8.1 per cent that same month from 7.6 per cent a month earlier — strongly propelled the national housing market forward.
The same data scoop shows that the national inventory of homes for sale is well balanced, allowing residential housing prices to increase by 5.5 per cent.
On average, residential real estate prices in Canada are 10 per cent higher now than they were before the recession — when they were at an all-time high.
Not too shabby — especially if you consider the rate of return available from stocks or bonds these days. But at a time of profound financial uncertainty (globally, continentally and nationally), rising unemployment (Canada unexpectedly lost 54,000 jobs in October, pushing the unemployment rate up to 7.3 per cent), record household debt and flagging consumer confidence, how shiny and tight is this all going to get before there's a loud — and familiar — popping noise?
An equally important question is what are the implications of a loud popping noise for the all-important rate of consumer spending (homeowners buy furniture, appliances and services in spades) and a number of economic sectors that have been fuelled by the real estate cycle.
As we face another economic downturn, it's important to remember what an important role real estate-related spending played in the recovery — however short-lived. After a brief slump, the Bank of Canada's decision to cut interest rates fuelled growth and the relatively healthy condition of the Big Banks kept mortgage lending alive.
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