What do low rates mean for a potential housing bubble?

What do low rates mean for a potential housing bubble?

What do low rates mean for a potential housing bubble? Finance Minister Joe Oliver has assured Canadians there is no housing bubble developing, despite record low interest rates that may entice some buyers to purchase more home than they can likely afford. 

“I’ve said again and again we don’t think there’s a bubble – the Bank of Canada agrees with that, CMHC (Canadian Mortgage and Housing Corp), OECD (Organization for Economic Cooperation and Development),” Finance Minister Oliver told reporters last week, according to the Financial Post. ““We’re, of course, monitoring the market. It’s not a huge concern at this point.”

Oliver has held an optimistic view of the housing market and its future since he took office in March of last year, and last summer, when a number of lenders dropped their five-year fixed rates, Oliver voiced his opinion that it is not up to the government to oversee interest rates.

“I don’t think it’s the role of government to set interest rates or rates for mortgages,” he told Business News Network in Mid-June. “The rates are quite low and they’ve been coming down but a very small amount.”

He also noted at the time that the market was healthy.

Interest rates have been a hot topic since the Bank of Canada slashed its overnight rate by one-quarter of one percentage point to ¾ per cent on January 21.

Several of the big banks followed by slashing their own prime rates and also offering special-priced fixed mortgage rates on various products. 
  • Kent Farnsworth 2015-02-02 1:56:06 PM
    I for one am so so tired of hearing about this bubble that doesn't exist (for the most part). It's true that in some parts of Canada housing is overpriced, but how much is it overpriced really? What would happen in Canada that would actually cause a total collapse in this market short of some complete catastrophic event? In the event of something like that, I would bet that housing values would be the least of our concern. If you talk about something enough, you can make it happen out of fear alone. This is one topic that I really would like to see just go away.
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  • Name (required) 2015-02-02 5:56:03 PM
    To see how Canadian real estate values make absolutely no sense is to analyze ratios on income generating properties to see the capitalization and compare that with general business and accounting practices. Among dozens of multi-residential rental properties I was looking at, I have also done study on Bayview Village in Toronto that sold sometimes in 2013 for half a billion dollars to corporation based in BC, but most likely funded by Chinese money.

    For your information, the Financial Post reported Toronto’s upscale Bayview Village Shopping Mall fetched $500 million and sold for a capitalization rate said to be in the 3.6% to 3.7% range. The cap rate — the rate of return based on what a property is expected to generate in rental income — is considered to be near a record low. According to Colliers International, cap rates in the Greater Toronto Area are approaching record lows across all property types. As you may know know by now, the acceptable capitalization ratio or ratio based on valuation of capital cost versus rental/lease revenues used by accredited commercial appraisers for commercial properties in GTA should be around 7%. Many investment companies including Life Insurance companies seek the 10% capitalization ratio for healthier returns. Let's just use reverse analysis to determine the true value of Bayview Village Shopping Mall. The division goes like this: Value=Net Income/Capitalization Ratio. For the Value we learned that Bayview Village sold for $500,000,000 and at Capitalization Ratio of 3.7%. Reversing the order of this division is Net Income = Value X Capitalization Ratio (3.7%) = $18,500,000/annually.
    Now let's use 7% capitalization ratio to determine what the purchase amount of the Bayview Village was supposed to be to reflect true value. Let's use the same formula in reverse order. Net Income X Capitalization Ratio=Value. $18,500,000 X 7% = $264,285,714.29.
    In another words Bayview Village was overpaid by almost twice. Who are those smart investors? I wonder if they speak any English or just like to frustrate true real estate values in this country for all of us.

    The above was in 2013 yet 2014 was even worst as it boils down to logic. My advise STAY AWAY FROM CANADIAN REAL ESTATE. But than who am I to tell you, right?
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  • Kent Farnsworth 2015-02-02 6:15:53 PM
    Ya, I'm going to dumb this down just a little... Toronto, Vancouver and yes maybe a couple of hot spots in Alberta as well are overpriced and there isn't anyone that has any sense at all would disagree. But there is a whole big country that the rest of us live in, and it's called THE REST OF CANADA. Come visit us here anywhere on the East Coast and try making that same arguement here. And really you should post your name in public forums. I'm not disagreeing with anything that you said. The problem is that you are zoning in on one specific area. "Who are you to tell me"? I don't know, you didn't tell us. Anonymous = Troll
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