Stephen Jarislowsky, chairman of Montreal-based investment adviser Jarislowsky Fraser Ltd., said he is convinced there’s a bubble in Canada’s housing market, fueled by government measures that encouraged consumers to take on debt. They have basically encouraged people to buy houses based on cheap mortgages, Jarislowsky, 84, said in a telephone interview from Montreal. That has created the opposite effect of what was desirable. Canadian home prices and resales will grow to records this year, boosted by low interest rates, the Canadian Real Estate Association said in a report this week. Canadian new-home prices rose 0.4 percent in December from the previous month, the sixth straight gain, government figures showed yesterday. I am convinced there is a housing bubble in Canada, said Jarislowsky, whose investment fund owns shares in Canada’s four biggest banks, including Toronto-based Royal Bank of Canada. The comments by Jarislowsky, who is one of Canada’s wealthiest investors with a fortune worth C$1.85 billion ($1.8 billion) according to Canadian Business magazine, contrast with the view held by Finance Minister Jim Flaherty, who sees no clear evidence of a housing bubble, his spokesman, Chisholm Pothier, said this week. Tax Credits Existing home sales will increase 13 percent and the average price will gain 5.4 percent to C$337,500, according to the real estate group, which is known as CREA. The real estate group, responding to a statement by the country’s competition watchdog, said it would make changes to allow consumers to buy cheaper services, according to newspaper reports. The changes, which members may ratify in a March 22 vote, would make it easier for sellers to post their homes on CREA’s Web-based directory without buying an agent’s full package of services. The potential is there for home buying conditions to actually become easier over the next one to two years via sharply lower average commission rates, Derek Holt, an economist with Scotia Capital Inc., said in a note to clients. Jarislowsky said the government should have put more stimulus money into boosting infrastructure, not household spending. Canada’s government, led by Prime Minister Stephen Harper, has brought in a temporary tax credit for home renovations, given a tax break to first-time home buyers and purchased mortgages from banks to encourage new lending. Low Interest Rates Bank of Canada Governor Mark Carney, meanwhile, has also pledged to keep his main interest rate at a record low 0.25 percent through June unless the inflation outlook shifts. The average five-year mortgage rate was 5.39 percent on Feb. 10. In May it was 5.25 percent, the lowest since 1951, according to Bank of Canada figures. I conclude that the prices of housing today in the U.S. are cheaper than they should be, and that the prices in Canada are far more expensive than they should be, Jarislowsky said. Bank of Canada Adviser David Wolf said in a January speech that it’s premature to conclude there’s a bubble in the housing market, and a rate increase to slow it would be dousing the entire Canadian economy with cold water, just as it emerges from recession. Mortgage Insurance Rules The Department of Finance in 2008 said Canada Mortgage and Housing Corp. would limit amortizations to 35 years and offer loan insurance on only 95 percent of the loan value. The government’s housing agency had offered mortgage insurance on loans worth as much as 100 percent of the home value and amortization periods of as many as 40 years since 2006. Pothier said this week the government has policy tools available to counter any negative trends in the housing market if needed. He didn’t elaborate. The booming housing market partly reflects the strength of Canada’s financial system, which was named the soundest in the world for two consecutive years by the Geneva-based World Economic Forum. To be sure, Jarislowsky said that consumers are stretched with respect to their debt burdens and that the government should seek to bring spending back to a sustainable pace. Excess spending by the consumer and going further into debt was the worst thing that they could do, and that is what has happened in Canada, he said.
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