February 11, 2010 / 1:51 PM / in 8 years

Home prices keep rising, Ottawa monitoring

OTTAWA (Reuters) - New home prices in Canada rose for the sixth straight month in December on historically low interest rates and rising consumer confidence, fueling fears the housing market is heating up too fast.

Statistics Canada said on Thursday that prices climbed 0.4 percent from November, matching the median forecast in a Reuters poll, but were down 0.9 percent compared with December 2008.

“If this pace of growth continues, builder prices should be back up to prerecession levels by next spring/summer,” said Scotia Capital economists Derek Holt and Karen Cordes in a note.

On a monthly basis, the housing-only component of the new housing price index rose by 0.5 percent and the land-only component slipped 0.1 percent.

“This should put modest upward pressure on core inflation although other factors, such as the strong Canadian dollar, should continue to keep inflation well-contained,” Holt and Cordes wrote.

As housing prices and sales gather speed, some economists have warned of a possible housing bubble in which home buyers take on more debt than they will be able to handle when interest rates rise, leading to an eventual collapse that could hamper the economic recovery.

Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney both said on Saturday they did not see evidence of a housing bubble, downplaying fears of a Canadian version of the U.S. subprime mortgage meltdown.

But Flaherty stands ready to tighten mortgage insurance rules for riskier mortgages if necessary, his press secretary, Chisholm Pothier, said on Thursday.

“There is no clear evidence now of a housing bubble in Canada,” Pothier said.

“(Flaherty) has policy tools available to take action to counter negative trends. He has used some of them before and can use some, or all, of them again.”

Former Bank of Canada Governor David Dodge suggested in a television interview on Wednesday that the federal housing agency, Canada Mortgage and Housing Corp, should look carefully at the current terms for insuring mortgages.

The Globe and Mail newspaper reported on Thursday that the main proposal the government is studying is to require banks to consider whether a person who takes out a variable-rate mortgage can continue to make payments if interest rates go up significantly.

The report, citing unnamed sources, said that after studying the potential impact of requiring higher down payments and shorter amortizations, the finance minister believes that such moves would take too much heat out of the market and damage the economic recovery.

Pothier would not comment on the newspaper report but said Flaherty was actively monitoring the housing market.

Reporting by Louise Egan

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