With a labour market that has recouped all its recession losses, a housing market that was not pummelled like in the U.S. and Europe, and a financial system that hasproven its solidity, Canada appears to be living in a glass bubble. What’s more, it’s the only G7 country to have tightened monetary policy since the end of spring.

The housing market is cooling, and the impending winding down of government stimulus programs will temper growth. Canada’s biggest weakness is probably exports. The course of the U.S. economy, combined with the current global uncertainty, should prompt the Bank of Canada to stop raising rates until next spring.

The CREA report said existing homes sales in November increased by a whooping 73 per cent compared to a year ago and prices rose almost 20 per cent.

“We’re on the bubble of a bubble,” Bank of Montreal economist Doug Porter told The National Post, sharing his worry about a potential surge of home sales before the central bank raises rates and the new harmonized sales tax is introduced in B.C. and Ontario. “We could see a bit of a buying frenzy coming this spring…followed by a “pop” in 2011?”

But despite continued fears that skyrocketing numbers signal the formation of an asset bubble, some insiders said the dramatic rise is due to how low the market was at this time last year. The number of listings also went up by five per cent from October to November, which is expected to help ease price increases.

“The numbers look huge, but you are coming off such a bad year,” TD Securities economics strategist Millan Mulraine told The Globe and Mail. “You’re seeing big numbers in the recovery, but the pace and momentum has eased. You could definitely say it’s not driving as fast as it was a few months ago.”

Another argument against a bubble came from Genworth Financial Canada president Peter Vukanovich, who told The National Post that because more consumers have been switching into fixed rate mortgage products, they will be less exposed to expected interest rate hikes.

Rising property values and a recent pickup in mortgage rates are at cause behind the numbers.

The decline in affordability was true in all major markets and in all types of housing, and follows steep declines since the spring of 2008. Yet despite the latest decline in affordability, it’s still better than it was a year ago.

“The current levels in the RBC measures are in line with those in early 2006 when housing market activity was shifting into high gear in Canada,” the report says.

The average rate on a five-year conventional mortgage went from 5.45 per cent to 5.73 per cent in the third quarter, according to the RBC. It was the first quarterly increase since last year.

The overall property market has also picked up.

“In markets such as Vancouver, which had been badly hurt last year, the turnaround has been nothing short of breathtaking,” says the report. “In that market, as well as in parts of the Greater Toronto Area, bidding contests are common again.”

• Our housing market has rebounded sharply; side-stepping the worst of our recession.
• After plummeting last fall, sales of existing homes have rebounded by a large margin.  Canadian housing sales have surged, leading to a rebound in resale home prices.
  
• After being largely out of sync since early this year, the market is now bursting with activity; being bolstered by better pricing and low financing costs.  You can look at it as having a much later than usual ’spring rush’.  This demand could slow as we enter November.
• While home listings are set to rise, home sales should be well enough supported to generate modest price gains in the near future.
• Recent Bank of Canada statements indicate that it is closely watching the housing market, expecting it’s recent strength to be ‘temporary’.
• If real estate activity does not cool, it may prompt the Bank of Canada to tighten it’s policy earlier and more aggressively than earlier anticipated.
  

Vancouver remains the most expensive city for houses in Canada and the tenth most expensive city in North America, according to the 2009 Coldwell Banker Home Price Comparison Index, which looks at the prices of 2,200 square foot homes in different markets.

Vancouver’s average price was $1,262,625 (CDN) while Fort McMurray, Alta, beat out Calgary and Edmonton with an average price of $638,000 CDN. Toronto’s average price was $824,347 CDN.

“Despite record-breaking prices in many of Canada’s major markets, these homes are selling, as buyers take advantage of today’s historically low interest rates,” said John Geha, president of Coldwell Banker Canada Operations, who described the type of house surveyed in the study as the “aspirational home.” “These move-up buyers have been a critical component in our resurgent real estate market, and will continue to play a major role in Canada’s recovering economy.”

Charlottetown, PEI, remained Canada’s most affordable housing market with the average price of a 2,200 square foot home at $158,667.

The seasonally adjusted annual rate of housing starts decreased by 5,700 units from June to July, the CMHC reported Tuesday, but the organization’s chief economist remained optimistic that the housing market is stabilizing.

“The slight decline in July’s housing starts is mostly attributable to the volatile multiple starts segment,” said Bob Dugan, Chief Economist at CMHC’s Market Analysis Centre (urban multiple starts decreased nationally by nine per cent). “Although July registered a decline, housing starts are expected to improve throughout 2009.”

CMHC also forecast that housing starts will gradually become more aligned with demographic demand, currently about 175,000 units per year. Several housing industry players have also conveyed optimism about the Canadian housing market. The Globe and Mail reported five signs for a housing recovery following the housing starts report, including the increase in home sales in July, low mortgage rates and a jump in building permits.

Statistics Canada reported Tuesday that building permits rose one per cent in June.

“While [first-time buyers] appreciate government incentives such as tax credits, it is markedly improved affordability that is proving to be the powerful drawing card,” said Phil Soper, president and chief executive of Royal Lepage. “Our survey demonstrates how important affordability factors such as interest rates and house prices are in stimulating demand.”

In the survey, potential buyers were asked to rank their top incentives for buying a first home – 86 per cent cited low interest rates followed by 81 per cent who said lower housing prices were the top motivating factor. Job security and a stable economy were the next ranked incentives.

Interest-only payments are an option for most international mortgages and Lloyds TSB also offers an international banking service for customers to set up their mortgage payments. The company’s Canadian representative offices are located in Toronto and Vancouver.