April 28, 2015 / 4:53 PM / in 3 years

Bank of Canada's Poloz: degree of housing overvaluation not unusual

OTTAWA, April 28 (Reuters) - Bank of Canada Governor Stephen Poloz said on Tuesday it was not unusual to see an overvaluation in home prices given the market’s long rally but reiterated the country was not in the midst of a housing bubble.

The central bank has estimated the housing market is overvalued by 10 percent to 30 percent. Poloz said that is a by-product of the sector’s strength since the global financial crisis, partly fueled by low interest rates.

“It would be very unusual to come through all that and not have a degree of overvaluation,” Poloz told the House of Commons finance committee. “One has that in every business cycle.”

The rise in home prices in recent years, particularly in the major cities of Toronto and Vancouver, has led some economists to speculate the country could be due for a painful correction. Those concerns have been amplified by the drop in the price of oil, a major export for the economy.

But Poloz said the sector is not in a bubble, noting that the bank has not seen the highly speculative behavior that is characteristic of such a scenario.

“If we were all buying a second or a third condo with confidence that it was going to rise in price, and sell it to someone else, that would be one of the ingredients you’d expect to see in a true bubble,” Poloz said.

He added that the bank does not see “truly runaway pricing” in the market, while construction has stayed in line with demographic demand.

Nonetheless, Poloz noted the housing market is one of the bank’s key financial stability risks and that policymakers are carefully watching how the oil price shock is unfolding.

The soft landing the bank is expecting doesn’t necessarily have to come from a gradual home price adjustment, but could come from the economy and incomes picking up, Poloz said.

Senior Deputy Governor Carolyn Wilkins, who testified alongside Poloz, said there are signs of a soft landing in many areas of the country, with Toronto and Vancouver being exceptions.

“Those two markets are continuing to grow quite robustly,” Wilkins said.

The bank, which cut interest rates in January, has said repeatedly that it is not the last line of defense in preventing financial stability risks stemming from housing and household debt.

Reporting by Leah Schnurr and Randall Palmer; Editing by Jeffrey Benkoe

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