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Merrill warns of Canadian Housing Bubble


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http://www.theglobeandmail.com/report-on-business/merrill-warns-of-housing-bubble/article1400028/

 

“We've got a long way to go before we could put a bubble label on this market,” economist Sheryl King said. “However, with mortgage rates at decades low – and even more attractive if home buyers choose the variable mortgage option which carries rates as low as 2 per cent – the seeds of a bubble are definitely in place.”

 

She said policy makers could underestimate the problem because of the way the Bank of Canada calculates inflation – overemphasizing new-home sales and ignoring the red-hot resale market in its consumer price index calculations.

 

“New-home prices can vary greatly from resales, and new homes are only 20 per cent of overall home transactions,” she said. “There is a real question of whether the CPI captures the full real estate asset story.”

 

New-home prices rose 0.3 per cent month-over-month in October and are up 1.1 per cent annualized in the third quarter, after 5 per cent declines in the first two quarters of the year. However, the Teranet 6-city home price index shows resale prices in the last three months are up 23 per cent on an annualized basis.

 

 

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