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2011 Bubble burst? - Alexandre Pestov thinks so

Blog by Shaun Kimmins | August 6th, 2010

The following are excerpts from an interesting article written by Alexandre Pestov at the Schulich School of Business

The cause of the housing bubble associated with the sharp run-up and the subsequent drop in home prices in the US over the period of 1999-2008 has been the focus of significant research attention. Despite numerous similarities, the Canadian housing market escapes the same level of interest, mostly due to the seemingly stable housing prices.

This paper explores the subject of a possible housing bubble in Canada. It examines a diverse array of factors that may have contributed to the rise in house prices in Canada. The paper evaluates each factor individually and determines the health of the Canadian housing market using common valuation techniques.

Results suggest that economic fundamentals in Canada provide little explanation for the Canadian house price dynamics. Market fundamentals have become insignificant in affecting house prices, and the price-momentum conditions characteristic of a bubble now exist. The extreme decoupling of the market prices from the underlying fundamentals suggests an upcoming correction in housing prices in Canada.

Wikipedia states:

Within mainstream economics, many believe that bubbles cannot be identified in advance, cannot be prevented from forming, that attempts to "prick" the bubble cause financial crises, and that instead authorities should wait for bubbles to burst of their own accord, dealing with the aftermath via monetary policy and fiscal policy.

History shows that this statement fully applies to the Federal Reserve led by Greenspan and Bernanke. However, a moderate knowledge of economics allows an observer to detect large discrepancies in asset valuation and to act accordingly. Presently, the Canadian housing prices exhibit a tremendous shift to extreme overvaluation. It is time to reassess purchasing decisions and act accordingly.

For the entire article: canadian-housing-bubble[1].pdf

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