Canada's real estate market just keeps rolling along.

For months, there's been nothing but good news for homeowners and real estate professionals. House prices keep rising and demand is strong as low interest rates and strong employment levels fuel the market. Many consumers are asking if the housing bubble is about to burst, as the busy market reminds them of conditions in 1989 when it all came crashing down and prices dropped dramatically. While most economists agree that won't happen this time, two recent reports advise caution.

"Twelve Canadian cities are reporting price increases in the double digit percentage range since the end of 2000. Not since the late 1980s has this pace of price gains been witnessed -- bringing the average nationwide house resale price up over the $200,000 thresholds for the first time in history," says Derek Holt, assistant chief economist for RBC Financial Group. "While current conditions have yet to reach a bursting point as seen between 1989 and 1996, there is enough troubling data to warrant concern and advise against an altogether relaxed and worry-free attitude in the market."

Holt says, "Speculative signs in residential real estate are emerging, and the current pace of price gains is not sustainable. This is especially true in the U.S. where housing inflationary pressures are rapidly building, but is also the case in pockets such as the Toronto condominium market."

He says that there's a large stock of unsold condominiums on the market, and that 120,000 new condos are projected to come on the market in the next couple of years. "Not only are unsold and proposed condos raising eyebrows, it is believed by local market analysts that at least one-quarter of condos sold in recent years have been purchased by investors seeking speculative gains as opposed to those seeking shelter -- casting substantial doubt on the true underlying strength of sales numbers."

But the good news is that the Toronto condo market is the only area that seems to be top-heavy with speculators. For other types of housing and in other cities, most units are being purchased by people who plan to live in them.

A much more positive study predicts that Toronto may be only halfway through its housing boom. David Rosenburg, chief Canadian economist and strategist for Merrill Lynch Canada, says, "Existing home sales in the Toronto area posted their best May results in recorded history, up seven per cent from a year ago and 26 per cent on a 12-month moving average basis. Housing cycles typically last around five years, so the good news is that the current one is barely past the halfway mark."

Rosenburg also says that because of the tight inventory of homes on the market, "it wouldn't be a stretch to see double-digit home price appreciation in the next 12 months."

"The biggest risk to the local real estate market outlook is the extent to which interest rates go up and the degree to which we start to see evidence of overbuilding, as we are seeing in some segments of the condo market," he says.

"Affordability levels are still so buyer-friendly that just getting to the historical average (under current income trends) would require either a further 200 basis point backup in mortgage rates, a 20 per cent jump in home prices, or some combination of the two. Moreover, it would take either double-digit mortgage rates or a virtual doubling in house prices to bring affordability ratios back to the late 1980s-style levels that threw a serious crimp into the market."

Holt agrees that "a repeat of the extreme conditions that have deflated house prices in the past is unlikely." He says that generational lows on interest rates, combined with the strongest job growth since 1987 and a shortage of new listings will continue to stimulate the market in the near term.

As interest rates creep up during the course of the year, the real estate markets in most of the country are expected to cool down modestly by the end of 2002, but they will still be very strong throughout next year.

Published: June 20, 2002

Use of this article without permission is a violation of federal copyright laws.

Jim Adair is editor of REM: Canada's Real Estate Magazine, a business publication for real estate agents and brokers. He has been writing about Canadian real estate, home building and renovation issues for more than 30 years. You can contact Jim at .